Sat, Dec 25, 2004 - Page 8 News List

Cigarette tax based on myth

By Paul Liu

The Department of Health is proposing to raise the "health tax" levied on cigarettes from the current NT$5 to NT$10 per pack.

According to health department officials, this will deliver double benefits: reducing the consumption of cigarettes as well as providing more tax revenues for the treasury.

Such an assertion might sound perfectly rational, but is in fact a myth created by anti-smoking campaigners who fail to recognize the unique nature of tobacco products.

Unlike other consumer products, the demand for cigarettes is semi-price-inelastic. This means that when the price of cigarettes goes up, the demand will not necessarily go down to reflect the price change.

Consumers might reduce their consumption to a certain extent as a result of the price hike, but the reduction will never fully match the amount of price increase.

Eventually, no matter how high the price of cigarettes is raised, the demand will become totally insensitive to the price.

Moreover, although it might be possible to see a short-term decrease in the demand for legally sold cigarettes, we can expect the demand for contraband products to go up in the long run.

As a result, an increase in the tax on cigarettes is incapable of effectively reducing consumption, and will eventually reduce the government's tax revenues as consumers switch to the cheaper, "tax-free" cigarettes.

The most effective way for the government to control the hazards associated with smoking cigarettes is not by increasing the tobacco tax, but through the strict enforcement of the Tobacco Control Act as well as appropriate public education.

Paul Liu


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