Nova workboard

a blog from young economists at Nova SBE

Can taxation change tobacco consumption?

Taxation is by definition a mean by government finance its expenditure by imposing charges on citizens or corporate entities. But taxation is also a tool used by the government to redistribute in order to leverage the society welfare, this could be achieved by investing in the public sector, like education and healthcare, or as a way to lead citizens to change their behaviour, for example by the taxes that Portuguese government implemented on sugar drinks, tobacco or alcohol beverages.

Therefore, when comes to taxes, remains the question: who puts up with the burden of the taxes? Consequently, it comes the concept of tax incidence. To a better understanding of this issue, let’s take as example the Portuguese taxation over tobacco. Tobacco is one of the main cause of chronic diseases, what makes it costly for citizens’ heath and also for the public healthcare sector. In order to discourage the consumption, similarly to what has been implemented in other European countries, cigarettes are charged by two elements: an excise tax and an ad valorem (VAT) tax.

For the government budget of 2017 (OE 2017), in regard to the previous year, the excise tax charged increased to 3% and the VAT to 16% for cigarettes. To face this taxation, entities increased the prices of each pocket of cigarettes by around 0,10€, this situation creates a shift to the consumers that end up supporting the burden of tax. However, tobacco is a bit controversial product since it cannot be easily classified as an elastic product demand, this means that there are low substitutes, additionally to the fact that is an addictive product, it is difficult to consumers just simply drop it. Consequently, the distortion usually caused by changes in consumed quantities would have little effect in this case in comparison with other products, like sugar drinks. This effect is commonly known in economics as deadweight loss, which describes the phenomenon of loss in efficiency, this means that the government did not reach the expected revenue, since as the price of the products increase due to taxation, the price sensitive consumers would look for less expensive substitutes, creating by this way the change in quantities bought by consumers.

A study driven by WHO, “Taxation and the Economics of Tobacco Control” states that tobacco taxation has been preventing non-smokers to star smoking and lead current smokers to try to give up. After taxation, tobacco consumption seems to have decreased around 5% in Portugal. However, the government revenues are still below from what is needed to cover the expenditures on diseases related with this product. But it can be asked: The decreased demand was only due to taxation? The answer is not clear, as it can rely on several factors, for example some people might have given up because they get ill or due to the law enforcement about rules of smoking in public spaces.

Raquel Teixeira


Author: studentnovasbe

Master student in Nova Sbe

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