Managerial Economics: Analysis of Tobacco Taxation in Australia

This report delves into the economic analysis of tobacco taxation in Australia, examining its various facets. It begins with an introduction highlighting the harmful nature of tobacco and the rationale for its taxation, emphasizing its role in raising health expenditure and government revenue. The report then explores the historical context of tobacco excise duty in Australia, including recent tax hikes. A significant portion is dedicated to analyzing the incidence of tobacco tax, considering demand and supply elasticity, and how the burden is distributed between buyers and sellers. The report also discusses the efficiency of tobacco tax, evaluating its impact on consumer preferences and its ability to reflect social costs, particularly externalities associated with smoking. Furthermore, it addresses the equity concerns related to tobacco tax, considering both horizontal and vertical equity, and the regressive nature of the tax. Finally, the report assesses the effectiveness of tobacco tax as a revenue-generating strategy, analyzing its impact on consumption, smoking rates, and government revenue, and concludes by summarizing the key findings and policy implications.

Managerial Economics
Name of the Student
Name of the University
Author note

Introduction
• Tobacco; no where necessaries
• Object of universal consumption
• Harmful for health
• Raising health expenditure
• Subject to taxation (tobaccoinaustralia.org.au 2018)
• Tobacco tax in Australia
• Exercise duty since 1901 (health.gov.au 2018)
• Tax structure undergone several changes
• Recent tax hiking price to AUD $40

Incidence of tobacco tax
• Tax incidence
• Division of tax burden
• Depend on elasticity
• Inelastic demand
• Greater burden on buyers (Hubbard et al. 2015)
• Inelastic supply
• Greater burden on sellers
• Demand elasticity of tobacco

Incidence of tobacco tax
• Demand is not as elastic as other consumption good
• Increase in tobacco price
• Moderate fall in proportion of people smoking and amount of tobacco product
sold (tobaccoinaustralia.org.au 2018)
• Tobacco tax raise prices
• Result in small reduction in demand

Incidence of tobacco tax
• Inelastic demand for tobacco product
• Supply elasticity is greater than demand
• Steep demand curve
• Tax increases price
• Buyers pay a higher price
• Sellers receive a smaller price
• The difference is the tax amount
• Greater burden on buyers
• Poorer smokers suffers the most
(theconversation.com 2018)
• Higher expenditure on tobacco
• Forgone consumption of basic necessities

Efficiency of tobacco tax
• Efficient taxation.
• Two criterion
• Minimal impact on consumer preference
• Relates product price to reflect social cost
• Tobacco demand; highly inelastic
• Application of inverse elasticity rule (treasury.gov.au 2018)
• Higher tax on less inelastic products
• Tobacco is neither necessary nor desirable good
• Inverse elasticity criteria is appropriate

Efficiency of tobacco tax
• Second criteria of efficiency
• Price reflects social cost
• Tobacco creates externalities
• Smokers impose negative externality on non-smoker
• Effect of passive smoking
• External cost; not considered in market price(treasury.gov.au 2018)
• Taxation increases market price
• Better reflection of social cost
• Taxation is efficient

Equity concern with tobacco
tax
• Equity means fairness
• Related to economic welfare
• Defined in terms of ability to pay.
• Horizontal equity
• Tax neutrality
• People having similar ability should pay similar tax amount (Hubbard et al. 2015)
• Vertical equity
• People with greater ability pay a greater amount of tax

Equity concern with tobacco
tax
• Proportional tax
• Progressive tax
• Redistribution of wealth
• Tobacco tax
• Fail to meet equity issue
• An important aspect
• Two equity issues
• Benefit principle
• Ability to pay principle

Equity concern with tobacco
tax
• The benefit principle
• Smokers imposes greater burden on public health system
• Should pay higher.
• Thus enhance equity
• Ability to pay principle
• Tobacco tax does not enhance equity
• Violates horizontal equity
• People with different ability pay same amount of tax

Equity concern with tobacco
tax
• Greater burden on poor smoker
• Does not satisfy vertical equity
• Taxation is in regressive nature
• Burden felt on fixed and low incomes (treasury.gov.au 2018)
• Poor are less likely to reduce smoking
• Unhealthy behaviors associated with low cost
• Adverse impact on health

Is tax a good strategy for
revenue collection ?
• Tobacco tax
• Raises government revenue
• Inelastic demand
• Lower deadweight loss
• More revenue is earned
• Not effective in Australia
• Revenue from tobacco exercise declines (aph.gov.au 2018)
• Consumption and smoking at a record low level
• Positive outcome of tax.