Death and Taxes: England Has Become the Latest in a Series of Countries to Vote for Restrictions on Smoking in Public Places. While This Is Clearly a Healthy Development, Writes Steve Adams, What Are the Wider Economic Implications of Giving Up on the Tobacco Industry?
Adams, Steve, Financial Management (UK)
I here's no doubt about the scale of the health problem caused by smoking. It accounts for four million deaths a year globally, according to the World Health Organisation, which expects the annual toll to rise to ten million by 2030. In the US (population 300 million) about 400,000 people die each year from smoking-related diseases. In the UK (population 60 million) the figure, although falling, is about 85,000--proportionally worse than in the US. To put it in perspective, the number of British nationals, military and civilian, who died as a result of enemy action in World War II averaged just over 79,000 a year.
Despite all the statistics, it could be argued that smokers are merely exercising their right to spend their income as they wish, whatever the consequences. But few governments take an entirely neutral view. Their concerns often reflect contradictory interests, which can be seen in how they tax and regulate the industry.
Most initially saw it simply as a convenient source of revenue. Given tobacco's addictive nature, the demand for it is extremely price inelastic--various studies have indicated a price elasticity of demand of between--0.3 and-0.6. This makes it an ideal subject for heavy indirect taxation without significantly reducing consumer demand or the industry's profitability. For many western nations the administration of taxes was relatively easy because tobacco was an import. Tobacco products thereby became a significant source of public revenue. Excise taxes on tobacco in the UK, for example, raised just over 8bn [pounds sterling] in 2003 in addition to the VAT levied on tobacco products. But, by the eighties, governments began to recognise the health and wider fiscal implications and started to use the price mechanism to discourage smoking. In the short term at least, this tended to boost taxation revenues.
The next development in government thinking reflected a recognition of the wider economic and social issues. Smoking could be assessed in pure financial terms on its impact on public budgets. On the plus side were two factors: smokers paid a lot in tax and, since their life expectancy was reduced, they would be less of a burden on the state pension system an ideal fiscal combination for finance ministries. If a UK citizen loses five years of retired life, for example, this would currently save the government a minimum of 23,000 [pounds sterling] in pension payments. On the other hand, smoking was generating serious costs for public health services. It's estimated that one-third of all cancer cases in the UK are associated with smoking. According to the British Heart Foundation, it also accounts for 18 per cent of deaths from coronary heart disease. The NHS spends about 2bn [pounds sterling] a year on treating smoking-related cancers and heart disease. To make matters worse, this treatment is largely ineffective: in the U K the five-year survival rate for lung cancer is six per cent, compared with 78 per cent for breast cancer. Smoking also emerged as a significant source of unemployment resulting from ill-health. Economically inactive individuals aged between 16 and 59 are the most likely people in the UK to consume tobacco (35 per cent of that group are smokers). While the relationship between smoking and economic inactivity is clearly complex, a proportion of these people will be off" work and on state benefits because of health problems caused by smoking. Workers who go off sick because of such illnesses also earn less and are not as productive. This in turn reduces GDP and taxation revenue. The scale of the problem was illustrated in 1998 when the US tobacco industry agreed to pay $250bn to the 50 states over a 25-year period to compensate them for the economic damage caused by tobacco-related illness.
Policy-makers began to accept that the balance was not as positive as they had once thought. There was a strong health reason for controlling smoking and the fiscal consequences of a decline in tobacco consumption were no longer seen as unacceptable. …