A large number of studies have investigated the relation between taxes and tobacco consumption (Baltagi & Levin, 1986, Becker et al, 1994, & Chaloupka & Saffer, 1992). Generally, such studies are based upon three different types of models [static model, myopic model, and rational addictive model] that opt to elucidate on the treatment of addictive behavior.
Within the static model, a standard demand for a product is determined through the analysis of the per capita consumption of the aforementioned product determined through the analysis of the product’s price [inclusive of taxes], the individual’s per capita income along with other controllable variables that includes socio demographic factors such as sex, age, education, and race. Within the myopic addiction model, a lagged consumption variable is added in the process of determining the amount of per capita consumption. The last model, on the other hand, assesses a product’s consumption through the analysis rational addictive behavior.
Within this model, it is assumed that individuals vary depending upon the amount of rationality applied in the process consuming a particular product. Rationality is thereby assessed in terms of the individual’s anticipated future consequences that correlate with a specific product’s consumption. In the case of tobacco consumption, Leclaire and Lanoie (1998) note that the last two models mentioned above [myopic model and rational addictive model] prove to be the most commonly used in the assessment of empirical data that shows the correlation between cigarette consumption and taxation (p.
87). Both models, according to Leclaire and Lanoie show that taxation functions as a regulative policy, in the case of tobacco consumption, since taxation enables tobacco demand reduction as far as it provides an incentive to decline from or stop from smoking. Within the rational addictive model, for example, cigarette consumption is directly affected by the individual’s income as far as the economic effect of smoking becomes a major influence in formulating a decision to continue or stop tobacco consumption.
Leclaire and Lanoie state, “both factors [taxation and regulation] are acting in a complementary fashion to influence the incidence of smoking” (1998, p. 88). In lieu of this, what follows is a discussion of the regulative function of taxation in the case of tobacco consumption. I will argue that taxation serves as a form of public regulation that enables the mass rehabilitation on cigarette consumption through increasing the federal taxes on tobacco products. Different tax structures are applied to tobacco and tobacco products.
The most basic amongst these structures include specific taxes levied as a fixed amount added to the base price of the product and ad valorem taxes levied as a percentage of prices. Besides the applicability of specific taxation structures to tobacco and tobacco products, additional taxes in the form of differential taxes may be imposed by specific countries due to specific factors that may be based upon the specification of the nicotine and tar content of a tobacco product.
The Statistical Annex for country specific data on the structure of tobacco taxes shows that most countries adopt a mixture of the above-mentioned forms of taxation of tobacco products. Regardless of the form of tax imposed upon tobacco products, it is assumed that increase in taxes will lead to the increase of prices of tobacco products. Gruber (2001) notes that the steep rise in tobacco prices assessed through the steep rise of cigarette prices in particular during 1982-83 and 1991 correspond to two major federal excise tax increases that further led to cigarette products’ price increase (p. 196).
At one point, one may presume that such a correlation merely shows the oligopolistic character of the tobacco industry since the tobacco industry may perform specific measures that will ensures the minimization of the impact of such taxes towards the participants within the industry. It has been noted, for example, that federal tax increase in tobacco products while significantly reducing smoking prevalence leads continuing smokers to consume tobacco products with higher tar and nicotine content in order to augment the economic effects of the consumption of tobacco products with lower nicotine and tar content (Keller et al, 1996).
Furthermore, such an increase may further lead to cross border shopping and smuggling since cigarette producers tend to charge relatively low prices in states where there are stronger state and local control policies. The tobacco industry, in this sense, defies the general assumption that underlies the fundamental law of economics in relation to the correlation between pricing and demand. Within the aforementioned law, it is assumed that as the rise of a product’s price leads to the decrease in the product’s demand. Tobacco consumption, however, along with the consumption of other addictive products defies such a correlation.
If such is the case, taxation of tobacco products as a regulative measure of tobacco consumption fails. However, it is important to contextualize the phenomena and thereby understand it within the dimensions of addiction. Alfred Marshall (1920) notes that such a phenomena may be explained if one considers that if a commodity fails to conform to the law of diminishing or increasing returns, it is important to consider that the increase or decrease of that commodity’s consumption is gradual since the habits incurred during the period wherein the commodity’s price is low cannot be quickly abandoned (p.
807). Hence within the sphere of addiction, the consumption of the product may be seen as following the dimensions necessary in the process of withdrawing from an addiction that being gradual adaptation [tolerance], irreversibility [withdrawal], and the positive effects of habits [reinforcement]. Such a dimensions enables the explanation of the tendency of such addictive products to defy the laws of supply and demand. In lieu of this, it may thereby be noted that taxation may function as a regulative method in cigarette consumption.
Regulation, in this sense, is applicable to the individual as opposed to the participants of the industry since regulation is constructed in such a way that the economic effects of cigarette consumption towards the consumer is continually increased so as to enable the consumer’s continuous withdrawal from the product and hence enable the reinforcement of the consumer’s habit of minimal cigarette consumption. References Baltagi, B. & Levin, D. (1986). “Estimating Dynamic Demand for Cigarettes Using Panel Data: The Effects of Bootlegging, Taxation, and Advertising Reconsidered. ” Review of Economics and Statistics, 148-155.
Becker, G. , Grossman, M. , & Murphy, K. (1994). “An Empirical Analysis of Cigarette Addiction. ” American Economic Review, 396-48. Chaloupka, F. & Saffer, H. (1992). “Clean Indoor Air Laws and the Demand for Cigarettes. ” Contemporary Policy Issues, 72-83. Gruber, J. (2001). “Tobacco at the Crossroads: The Past and Future of Smoking Regulations in the United States. ” The Journal of Economic Perspectives, 15. 2, 193-212. Leclair, P. & Lanoie, P. (1998). “Taxation or Regulation: Looking for a Good Anti-Smoking Policy. ” Economics Letters, 58. 1, 85-89. Marshall, A (1920). Principles of Economics. London: Macmillan & Co.