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Paying what it costs

Yesterday, the federal government announced a 20% increase on tax on cigarettes in Australia. This is a good move, but perhaps not for the reasons you think… And smokers have a point when they say they are being unfairly targeted.

Smoking costs society a lot of money.  In Australia, where we have socialized medicine, that cost is borne by society as a whole.  Increasing taxes on cigarettes means that, rather than the cost of this medical treatment being borne by all of society, it is instead borne by those who smoke.  It’s a way of correcting markets, which fail to cost in negative externalities.  If health care was paid for out-of-pocket- which poses another set of problems entirely- the tax would be unnecessary.  But because it is not, it is necessary for taxes to exist on cigarettes so they accurately reflect their true cost, and that cost is being borne by the individual rather than by society.

This notion, of pricing for negative externalities (a dreadful phrase!), is, I think, one of the better ideas liberals have. It’s almost a fee-for-service model for tax that, if applied appropriately, could serve both as an encouragement for behaviour modification, but also as a mean to reduce other forms of taxation.  It could also produce revenue that could be used to subsidise things with positive externalities, such as gym memberships or farmer’s markets.

The problem is that, at the moment, it’s not applied consistently and, at present, only applied to things that are already either socially taboo or moving in that direction.  Shelving the emissions trading scheme the very same day as raising cigarette taxes was a very poor move from Rudd.  The logic behind taxing carbon emissions is exactly the same as the logic behind taxing cigarettes: including the societal cost into the actual price of something.  Naturally, this is a problem with taxing carbon emissions,  because it’s an international cost, rather than a national one, but the principle is certainly the same.

Smokers have a case in saying they are unfairly discriminated against.  There are a whole realm of things that could be taxed to cover the costs of negative externalities.  Alcohol is, but you could make the case that that tax should be increased further.  A “fat” tax could price the cost of obesity into unhealthy food products.  Marijuana could be legalized and taxed to cover its cost on society.  Petrol taxes could be raised to cover the entire cost of road transportation.

So the cigarette tax is good, but the government should apply this principle more broadly.

3 thoughts on “Paying what it costs

  1. The total tangible and intangible cost of smoking is, according to this study from a few years ago, around $3.1 billion: http://www.health.gov.au/internet/drugstrategy/publishing.nsf/Content/mono66/$File/mono66.pdf

    Rudd was saying that this tax was going to raise $5.5 billion.

    Given that smoking is already heavily taxed, doesn’t this mean that the government is profiteering (far more so than the tobacco sellers, I imagine) from smokers?

    More broadly there is a real issue with advocates/politicians finding something they don’t like, conjuring up a study that attaches a dollar figure as an “externality” to said activity, and using it as an excuse to increase regulation, taxation and control.

    I don’t smoke but see this as very sinister. Wine labels are far far more creative and often alluring than any pack of Winnie Blues — many, most drinkers, buy off label alone. Are they next? The endpoint is a very anodyne world.

  2. I agree heartily in principle with the idea of pricing externalities, although the main issue with it is that externalities are usually damn hard to accurately price. For example I’ve actually seen studies before that suggest that smokers save the public health system money by dying more quickly and cheaply than people who linger around while their body slowly wears out naturally. A quick google search for example brought up this.

    The other thing that gives me pause about smoking and obesity taxes are that they are the most regressive taxes of all, because people lower down on the socio-economic scale smoke more and eat more junk. A carbon tax will also be a little bit regressive, because like any production or consumption tax it hits people hardest who spend most of what they earn. I still think we should tax tobacco, junk food and above all carbon, but we would definitely need to keep in mind where the money came from when figuring out how to spend the extra revenue.

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