Can we safely remove indirect taxation from cigarettes?

Updated: Sep 7


All governments of the world are incentivized to maximize the profit margin of “Big Tobacco” from cigarette sales.


Tobacco taxation is one of the most convoluted topics in the policy sphere. So many policy mistakes have been made, and each mistake has had dire unintended consequences, which we are now living with.


Cigarettes for soldiers

Tobacco smoking has been culturally prevalent across the globe in different forms for centuries without any culture of pre-rolled cigarettes. Cigarettes are different from tobacco. They are mass-produced. They are made to have a longer shelf life than regular tobacco. They were in fact the first global Fast Moving Consumer Good of the modern economy.


Cigarettes started being rationed to soldiers during the First World War because it was thought that smoking would help the troops stay alert. This is the first instance of government intervention in the industry. Government contracts are tricky and sticky. They are difficult to renegotiate/ withdraw from, and are less profitable over time as the cost of corruption and intervention increases; especially post-war.


“Big Tobacco” needed to expand its market further to ensure its operational sustainability, and they were getting better at that with each passing day. With the help of Mass Communication technologies such as film and television, we saw the birth of global marketing and global tobacco brands.


By 1969, all US states had implemented a cigarette tax. Yet, cigarette rations began only to be phased out by the US military in 1975. Russia wasn't ready until very recently to eliminate cigarette rations to military personnel, and bear in mind that military service in Russia is mandatory.


Taxation and Tobacco

As the majority of businesses began to shift to global trade in markets with larger populations, National governments had the opportunity to tax cigarettes at their ports. The lucrative trade greatly improved Central government revenues, from indirect taxation and greatly empowered them in comparison to their constituent governments at the local level. Eventually, they had the power and courage to convert an excise tax into an indirect tax. Now unless revenues from smoking can be sustained, a large portion of National Government expenditure cannot be funded.


To this day, many central governments of developing countries rely on indirect tax on tobacco as one of their top sources of revenue. In India for example, government revenue from tobacco sales accounts for around 20% of $20 Billion in total revenues. In the USA, 55% of the price of a cigarette is a tax either by the Federal government, or a state. If people stopped smoking, many government programs would need to shut down.


What about corporate taxes on Big Tobacco


Note that sales and excise taxes on cigarettes is a major source of revenue for the government, but not a corporate income tax on “Big Tobacco” companies. Are we all supposed to believe that an indirect tax on a tobacco product reduces tobacco consumption when the demand for cigarettes has been found to be highly inelastic. Indirect taxation is the wrong policy to achieve any positive public health outcomes.


Peculiar and overly complicated global initiatives by UN agencies such as the Protocol to eliminate illicit trade in tobacco products are leading to tier-based taxation and price controls, all meant to sustain Big Tobacco, who dump their excess production into the illicit markets of developing countries.


Government taxes “Big Tobacco”, not tobacco farmers. Nobody messes with the farmers because their businesses are protected by established property rights which are harder for Central Governments to deny using statutes. In many parts of the world, that is as good as threatening the social fabric of a region or community.


We do live in an age of global cigarette marketing oligopolies.“Big tobacco” is not in the business of manufacturing or growing tobacco at all. They blend tobacco, and they roll your cigarettes. Anyone who smokes cigarettes may also be familiar with loose tobacco. You may also have noticed that it costs a lot less than cigarettes. Very strange indeed!


With the advent of tobacco plain packaging, we might be headed towards a future where only one a handful of government contractors can manufacture cigarettes in the world. 1984 much?


Individuals pay indirect taxes, companies are simply withholding agents. “Big Tobacco” is actually great at evading Direct taxes. The income tax is broadly bypassed by simply consuming any possible excess margins as operational expenditure. Hence we have bloated companies, where deductibles rule the roost, and efficiency is not a priority. This does not at all smell like free-market economics!


It's all about cash flow baby!

If you are used to unnaturally high-profit margins in a primitive industry that inherently lacks value, you better have the government on your side.


It is hard to digest that Big Tobacco could ever be able to maintain its operational cash flows and its creditworthiness without the inflated Indirect Tax collection it withholds on behalf of the governments of the world.


It is also hard to believe that a mostly unspectacular plant like tobacco is more expensive than a bag of salt. Tobacco is such a major player in the global economy that this distortion in market forces has global consequences. Senseless outcomes follow.



Science-based policy, unethical modern propaganda

Government-funded studies establishing correlation are universally unethical because they enable a culture of authoritarianism. A good policy should be able to serve its purpose despite the uncertainties of the real world.


The present is always full of uncertainties, and a heuristics-based approach may be far better at addressing our policy woes than scientific fact.


Many people are moving towards high fat Ketogenic diets for health reasons. This is in complete opposition to the high carb food pyramid long endorsed and recommended by the scientific research establishment, and national governments. This is happening despite the fact that a great deal of "credible research" exists against high-fat diets. Things change. Ideas are weighed by their effect.


Correlation does not entail causation. But correlation studies sure do help pay the bills!


Governments pending money on studies establishing correlations serve no productive purpose. Such spending is only good for establishing political support for lazy special interest policymaking.


Nicotine, Niacine and Nicotinic Acid

Nicotine is thought to be the addictive substance within tobacco. Nicotine is found naturally in tobacco, but in smaller amounts than what is found in cigarettes. Nicotine is extracted from low-grade tobacco and then blended into higher grade tobacco. Over the years, cigarette companies have been slowly increasing the concentration of nicotine in their product, and not many people know about it because this is not marketed to the public. This is very unusual. Imagine that a Marijuana manufacturer decides to ramp up the THC potency of his products, and doesn’t choose to advertise it.


The sheer size of research conducted to study the ill effects of nicotine is astounding. One would imagine that a handful of studies would be enough to establish such a claim. But money continues to be pumped into the research of this nature. Maybe there is a reason for that!


Niacin was originally Nicotinic Acid

The name was changed to disassociate it from Nicotine! Vitamin B3 comes in many closely related chemical forms. The most popularly known form of B3 is Niacin. Niacin is created by the body through the oxidation of Nicotine with nitric acid. It protects against pellagra and is an essential vasodilator.


How do you prove that a vitamin is a poison? This research path will not lead to a justification of the regulatory control over the tobacco industry. It may however explain the inelastic nature of the demand for nicotine and the addictive essence of it.


Taking any vitamin or essential mineral in high excess should create toxicity, then tolerance, and then finally dependence on large amounts of it. Smoking is most closely correlated/ associated with cardiovascular diseases and cancers. In fact, cardiovascular diseases and cancers are amongst the leading causes of death in the world. And correlations with the most prevalent diseases in the world are not hard to establish for creative funded research.



Reversal of Policy


If the governments of the world would withdraw indirect taxes on cigarette companies, what do you think will happen?


The government would be the ones to suffer, experiencing drastic reductions in revenues within the first year. Smaller cigarette companies would happily provide their product at a lower price and might create pressure on Big Tobacco to lower prices as well. In any case, their business model would change drastically.


Will cigarettes become more expensive or less expensive? Will there be more companies or fewer companies in the market?


Cigarettes should become less expensive in the short run. The removal of Indirect Taxation should clear the path against significant barriers to market entry for new players. Cigarettes are not considered a superior product in terms of quality compared to alternatives such as loose tobacco. It is their wide availability and long shelf life that makes them convenient. Small businesses would be able to compete against Big Tobacco on quality, taste, and ingredients. The size of the average cigarette manufacturer should diminish significantly under this setting.


Tobacco farmers would not be affected in any significant way in the short run. In the longer run, their profit margins might increase, because they would not have to negotiate with oligopolies.


Will consumers increase their demand for the product in a meaningful way?


The consumption of cigarettes would not increase because demand is inelastic. Tobacco lobbyists will insist that consumption would increase because new smokers such as teenagers will find smoking more accessible. But in fact, cigarettes are not expensive at all; they are just more expensive than they are supposed to be. Pricing is not a significant hurdle to the adoption of a smoking habit.


Will the incidence of cancer and cardiovascular disease increase within the global population?


Inelastic demand for cigarettes will ensure that the increase in cigarette smoking will be insignificant. We should not see a drastic worsening in the cardiovascular and cancer outcomes within the general population. It is possible that the life expectancy of individual smokers may diminish because individual consumption may rise, but then again, it may not be as simple.


Conclusion


The argument in this article can be summarized so; without government intervention, the manufacture of cigarettes would not be as high stakes a business as it currently made to be. The removal of indirect taxes on tobacco will virtually eliminate the oligopoly of Big Tobacco as we know it.


Overall, there would be no harm in a complete withdrawal from the established policy frameworks by all governments and the United Nations.


If the governments were serious about addressing the effects of tobacco use, they would invest in research to understand the causes of Cardiovascular and cancer. And then invest in innovations that can cure these diseases. Indirect tax on tobacco is a bad idea; it is pushing us towards Orwellian outcomes!

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