Increase Tax on Tobacco
Everything that you earn and almost
everything you buy is taxed. Tax is the division of the burden of a tax between
buyers and sellers. Malaysian government wants to increase the tax on
cigarettes because simply, they want to reduce smokers in Malaysian.
Figure 1
Figure 1 shows the demand curve for tobacco companies
before tax is inelastic. The price that consumers pay initially per pax is P. P
also represents the price that the producers receive. The price per pack that
consumers pay is the revenue per pack that producers receive. Smoking is
a habit that is hard to kick. Hence, demand for cigarettes is highly inelastic.
If there is a large price changes, it will only result small changes in the quantity
demanded. Only large price increases will shrink demand curve because the
demand is inelastic to price changes. Inelasticity
and the burden of tax go hand in hand. The burden of a new tax falls very
largely on the consumers with most of the revenue coming out of consumer
surplus.
Figure 2
In figure 2 shows the graph for tax
on buyers. A tax on buyers shifts the demand curve from D to D-tax on buyers.
The equilibrium quantity decreased from Q1 to Q2, the price paid by buyers
increases from P1 to P3. the price received by sellers falls on P2. The tax
raises the price paid by buyers by less than the tax lowers the price received
by sellers so buyers and sellers share the burden of tax. Essentially the
effect of the payments is to increase fixed costs for the tobacco producers. In
conclusion, prices are raised and consumption falls.
When a tax is
increased, its burden falls on those consumers or producers who cannot move to
a substitute product to avoid the tax. Consumers will still buy cigarettes even
if the price is increasing because there is no substitution for cigarettes. For
producers, the resources used in producing the product cannot easily be
deployed in the production of something else. The availability of substitutes
determines the steepness of the demand curves of consumers or the supply curves
for producers.
Figure 3 illustrates in this market for
cigarettes, demand is perfectly inelastic because there is no substitution for
cigarettes in Malaysia ,
the change in surplus resulting from the settlement Most of the tax comes out of consumer surplus. The producers lose
much less surplus. Consumers are willing to pay for the price of cigarettes
per pax even if its increases. Cigarettes is an inelastic demand because smokers
will still buy cigarettes even if the price goes up. They could buy less if the
price is up. Even if the price of cigarettes increases, the demand is not
significantly impacted. It is difficult to reduce the consumption of cigarettes without making a big changes. Dead weight loss is the sum of the
consumer surplus and the producer surplus that is not transferred. It is simply
destroyed by the tax. This is a general principle Taxes on goods for which
demand is inelastic destroy less consumer surplus. The total loss of surplus to
society will be less than the dead weight loss if the government invest the tax
proceeds in projects that have positive net present value.
The price of cigarettes per pax from 2010 to 2012 is
increasing. From RM6.40 to RM 10.00 per pax, but at the end of the day, people are
still buying cigarettes even if the price is increasing. It is true that Malaysia sells cigarettes at a low price. In other countries, they sell one pax of
cigarettes for almost RM 40. In my opinion, if the government wants to increase the
price of cigarettes per pax from RM 10 to RM 20, then they should increase
it. Even though people will still buy it, they will eventually buy it lesser.
Maybe they will buy it at least twice a week because the price is too
expensive. They will have second thoughts to buy it.
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