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Wednesday 7 December 2011

Increase Tax on Tobacco


It has been published today that a study by Cancer ResearchUK which looked at all the cancer patients diagnosed in 2010, has found that 43% of tumours are preventable by avoiding unhealthy lifestyle choices.  The biggest cause of preventable cancer cases: tobacco. Smoking causes 1 in 5 cancer cases every year and is to blame for 9 in 10 cases of lung cancer. As well as this, smoking is also a bigger cause of liver cancer than alcohol. 

In 2008, the NHS spent over £5bn on cancer diagnosis and treatment including screening, drugs, surgery, however it is estimated the actual cost to the government is closer to £18bn when taking into account the loss of productivity and hospice costs. So, hypothetically, if we could eliminate all cancer caused by tobacco, the NHS could save up to £1bn a year and in total, the government could save up to £3.6bn.

Clearly, there are great advantages to be had in reducing the number of people smoking, in both lives saved and the reduction in the amount the government would have to spend on cancer patients and it’s no surprise the government has run campaigns to reduce smoking in the past. In 2003, new EU regulations meant that cigarette packets had to carry either the warning ‘smoking kills’ or ‘smoking seriously harms you and others around you’ on one side which had to cover at least 30% of the pack. On the other side, an additional warning had to be displayed covering over 40% of the pack, e.g. ‘Smoking clogs the arteries and causes heart attacks and strokes.’ As these had little effect on the number of cigarettes sold, the government introduced in 2008 legislation which meant that cigarette packets had to display a picture warning on the reverse, however, again, this has had little impact.

My solution: increase tax on tobacco. In March 2010, the duty oncigarettes in the UK was 24 per cent of the retail price plus £119.03 perthousand cigarettes and this duty was set to increase by 2% above RPI everyyear. This rate of tax is one of the highest in the world for tobacco products but I believe it could be increased further. One of the main reasons the government will never consider banning smoking and tobacco products altogether is that it produces a lot of revenue. Therefore, I propose that we squeeze every last bit of money out of the tobacco industry especially at this current time when the government is desperate to reduce the budget deficit in this country.

Tobacco products are very price inelastic, meaning that a big increase in price will produce only a small increase in sales. Therefore, an increase in tax will almost certainly guarantee an increase in income for the government. The Tobacco Manufacturers Association claims that the UK government made over £9bn from excise duty on tobacco in the 2010-2011 tax year.   Let’s assume for now that cigarettes are perfectly inelastic. If we increase the excise duty by 50%, to 36% of the retail price - this would increase the price of a 20 pack of Windsor cigarettes from £5.63 to about £6.30 – the government would gain an extra £4.5bn in tax.  This would almost pay for all of the NHS diagnosis and treatment of cancer.

Now, obviously in reality, no product is perfectly inelastic so the extra tax revenue would not be this high as some people would stop buying cigarettes, or at least cut down.  However, this would mean a decrease in cancer costs for the NHS. I would say that this is a win-win situation for the government – as long as they don’t increase tax too far - as the most likely outcome of an increase in excise duty would be an increase in tax revenue coupled with a decrease in people needing treatment for cancer.

The Opinionated Genius

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