Tax increase on cigarettes

Article 2

http://thestar.com.my/news/story.asp?file=/2012/9/14/focus/12024429&sec=focus

The Malaysian government may raise the tobacco taxes in Malaysia in order to discourage smoking to Malaysian adolescents. According to Maybank Investment Bank Bhd, they are to cut its budget deficit. But by increasing the tax of tobacco concerns over the serious illegal cigarettes trade in the country. Based on 2012 studies, the incidence of illegal cigarettes has dropped from 39%(which is 2 year ago) to 34% now. This trend is a result of the government having a strong enforcement and not increasing tax last year. In 2004, the government increases a high amount of tax on cigarettes which leads a 30% drop in the legalize industry volume. However the Global Adult Tobacco Survey (GATS) by the world health organisation said that the number of smokers in Malaysia is still the same. This explained that the smokers have switched to illegal tobacco cigarettes. One of the articles also said that the World Bank is recommending the tax to be at least 65% but in Malaysia it is only 45%. Legal tobacco cigarettes have been made less affordable in Malaysia. It is the illegal cigarettes remained unchanged in price over the last 10 years.

In economic term, tax incidence is the division of the burden of a tax between buyer and sellers. When an item is taxed by the government, the price might rise to full amount of the tax, by a lesser amount or even not at all. If the price increases by full amount, the buyers pay the tax. If the tax increases lesser amount then the tax, the seller and buyer share the burden on paying the tax and if the price maintains the same, the sellers pay all the tax. In this case, the buyers pay the full amount of tax on the cigarettes. If we raise the tax on cigarettes, the tobacco companies will just pass all the tax to the consumer. This statement shows that the government decides who to burden the taxes on. They want to increase its tax in order to stop adolescence to stop smoking. In Malaysia, only the people who could not afford to buy cigarette will try to stop. There is a reading where consumers will just move to a cheaper brand of cigarettes or either move to illegal smuggle cigarettes. Imposing taxes have certain positive and negative influences in the economy. The influences are including smuggling of illegal cigarettes, might cause a problem for the poor, and less health problem. Increasing tobacco tax rates is a way to help boost the economy and generate health savings for country facing budget deficits. It will impact the poor because they will have to spend a higher amount of mother of their income for purchasing cigarettes.

This is related to elasticity of supply. Why is elasticity is includes in this? it is because it determines the distribution of the burden of taxes which is tax incidence. To understand the key of tax incidence is to realize the tax is not a tax on person. It is a tax on every transaction for example buying sugar, salt etc... Other than that, the price elasticity of demand will also decide the decrease of demand for cigarettes. The demand of cigarettes decreases will lead to reduces tax revenue.

 An example is that if there is a RM4 tax on cigarettes means there must be a difference between what the seller gets and what the consumer pays. It doesn’t really matter where the taxes goes. In this case the taxes are imposed to the buyers of the cigarettes. You were supposed to sell the cigarette pack at RM6 or even higher but with the RM4 tax added needed to pay, the price is too high for cigarette pack to be above RM10 so the cigarettes increases to RM10 only which effect the demand curve to move rightwards The graph bellow with show the result.

In the graph above, the gap between S1 and S2 is the amount of tax of RM 4. The tax results the quantity demanded on cigarettes to reduce from D1 to D2. The price of the cigarettes is also raised from P2 to P1. The producers will only receive the price at P2 and below where they have to pay the tax.

There are also Tax Incidence which would affect with elasticity of demand. The tax between buyers and sellers always depends on the elasticity’s of demand and supply. To see how it affects there are 2 cases where it would effect on it. 1^st is perfectly inelastic demand where buyers pay the entire tax. The second one is perfectly elastic demand where seller pay the entire tax to the government. The more inelastic in the demand, the gap for the buyers to share the tax of is bigger. Next is tax and efficiency. Without tax, marginal social benefits equals to marginal social cost whereby the market is efficient. But when marginal social benefit exceeds marginal social cost, the tax is inefficient. The total surplus of the market is also maximized. The tax revenue takes part of the total surplus. When the tax keeps on increasing, the tax decreases the quantity supplied, raises the buyers price which would reduce the demand and lowers the sellers price where they will have a least profit in it. The decreased in quantity supplied creates a deadweight loss too.

In conclusion, the government is trying to increase the tax of cigarettes so that the consumption of cigarettes will be lesser. By raising taxes will benefit the society because they will not be able to spend more money on cigarettes so people will smoke less or quit smoking. Although the tax if cigarettes increase does not mean that everyone’s demand may decrease. This may cause the poor to spend more of their income which made them poorer. They will also change to cheaper brand of cigarettes. This may cause smuggling activities and black market cigarettes will start to earn more money than before. The government should strengthen the law to catch the illegal activities of smuggling cigarettes.