Monday, May 27, 2024


Dhaka Tribune


Squeeze them till they choke

Taxing tobacco addicts is a gold mine for the government, not a promise for improved health care expenses

Update : 27 Apr 2024, 04:55 PM

We should increase the taxes on cigarettes and tobacco and bidis. But not because it's going to reduce health care expenses in the future. Largely because it's not going to reduce health care expenses in the future. This is one of two errors in the report from the PROGGA and ATMA conference. Well not from the report on the conference, but the report by the conference that is -- it's not my employers at this newspaper getting things wrong, it's the people having the conference who are.

The claim is that: “Raising tobacco product prices through effective taxation would also reduce the government's healthcare expenses related to tobacco-induced diseases,” because “this move could potentially prevent the premature deaths of nearly 1.1 million Bangladeshis,” and the problem is that every specific statement there is true but the overall result is wrong. 

Yes, obviously, if fewer people smoke then the health care bill from smoking will be lower. Clearly and obviously this is true. It's also true that smoking kills -- the usual estimates are that between one-third and one-half of those who smoke are killed by the habit. The other two-thirds to one-half die of something else first. 

However, to put those together and say that the health care bill as a whole rises as a result of smoking is wrong. Health care is a public cost. The shorter lives are a private cost and it's essential to differentiate between the two. 

Now, one of the sadnesses of this life is that it does come to an end for each and every one of us. A health care system is going to treat us until that happens and as that is happening. As it turns out, dying of a tobacco related disease is cheaper, in terms of health care, than many other ways of dying. This was pointed out by Sir Richard Doll when he made the (true) link between smoking and lung cancer. There aren't that many treatments for lung cancer, death comes quite quickly. This is cheaper for the health care system than someone living another 10 or 20 years and requiring care through those decades. 

Those private costs -- the shorter life spans of smokers -- are high, very high indeed. But they're private costs, not public nor health care system ones. So, smoking saves health care systems money. The money that has to be spent tends to turn up earlier, yes, but it's less overall. 

Because tobacco is addictive, we can pile lots of tax on it before people change their behaviour

So, we'll not reduce health care costs by increasing the taxation of tobacco. 

We can, entirely, say that we're going to reduce the number who smoke by increasing taxes. Nicotine is addictive and we should save people from their addictions. Encourage the use of vapes to aid that transition and all that, why not? Well, obviously, to do that we've got to agree that it is the government's duty to save people from themselves but quite a lot of people do believe that.

But we should still tax tobacco, cigarettes, and bidis hugely. Swingeing taxes, as much as people will bear. Simply for the reason that we've got to get our tax money from somewhere. And the thing that economists always worry about is the distortion produced by taxation. 

If we tax this thing then people will change their behaviour. Changing peoples' behaviour because we need to pay for the government is probably a bad thing. If we tax incomes then people will work less and earn less. If we tax imports then fewer imports will happen -- the same applies to exports. If we tax consumption then people will consume less, if we tax savings then people will save less and  so on and on. 

How much behaviour changes as a result of the taxation is known as the “elasticity.” The elasticity of demand with respect to a change in price. The higher this elasticity is the more people change their behaviour as a result of the tax. It's the change in behaviour which we think is the bad thing, because it's a distortion of the natural shape of the economy just because we've got to pay for the government.       

But, because tobacco -- nicotine -- is addictive, we can pile lots of tax on it before people change their behaviour. So, we can run the government without introducing those distortions into the economy. 

It really is true that reducing smoking increases health care costs over time. It's also true that we should tax tobacco -- and bidis -- until the eyes water. I mean, why not?  


Tim Worstall is a senior fellow at the Adam Smith Institute in London.

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