Article 3

‘Taxes vs. Addicted smokers’

Government tends to take many decisions at microeconomic level that can influence different elements involved in the concept. The most common deed in this regard is to impose taxes on different products in order to earn the revenue or to discourage the sales of certain products. This analytical report includes the discussion upon the published article dated 5^th October 2012 called “Cigarette Tax Campaign Lights up”. 

(http://www.connectmidmissouri.com/news/story.aspx?id=809679#.UHAqTE2TyQw)

The following discussion tends to analyse the article while considering different microeconomic concepts. Within the discussion, the law of supply and demand and indirect taxes are discussed. The following discussion provides the insights of the government’s decision to increase the tax on tobacco products. The discussion is carried out while discussion the core concepts within the microeconomics and the insights from the article. 

From the article, it can be observed that the government would raise taxes for cigarettes in Missouri from 17-cents to 90-cents per pack. Many store owners show their opposition through sign and flyers. Suppoerters believe that tax would generate at least $283 million a year in new revenue. However, the article represents the support from different angles and also criticizes the government act on increased tax on tobacco and its product. Relating it to the microeconomic concept, it can be observed that government tends to impose two different types of taxes, one is the direct taxes, and other one is the indirect taxes. Taxes of each nature have the ability to influence the supply and demand of the product. The article refers to some individuals, and reflects mixed ideas regarding the consumption of the product. On the one side, smokers will keep smoking, no matter how much price is increased; on the other hand, there are also those, who are worried about the increased tax on tobacco and its related products. 

First, it is essential to realize the concept of indirect taxes. These are the taxes that are imposed by the government on the producers. It may include sales tax or excise duty taxes on luxury items, alcohol, and other related products. Indirect taxes are also called the expenditure taxes. The main purpose behind imposing such taxes is to increase the tax revenue for the government and discourage the use of harmful products. 

Following graph shows the effects of tax on supply curve: 

Next diagram shows the effects of a specific tax:

 

As it can be seen from the graph, P₀ and Q₀ represent the market price before the tax is imposed. P_b is the price (including the tax) paid by customers. P_s less the tax is the price that sellers receive. Buyers lose A+B, sellers lose D+C, and the government earns A+D revenue.  

However, the critical economic concept in this regard is related to the elasticity of demand. And Price elasticity of demand refers to the reaction of quantity demanded after increases or decreases of the product’s price. Thereby these taxes are observed to have more impact on revenue of government rather than smokers’ behaviour, so it can be seen concluded that the demand is inelastic.

   

When demand is inelastic, the producer is able to put all or most of indirect tax to the consumer by increasing the price of product.

The main issue is the fact that whenever government tends to enforce indirect taxes, the price of the product increases. Since indirect taxes or those taxes that are imposed on producers. However, producers have the ability to shift the tax burden on the consumers by increasing the price of products. The different economists agree that the increase in the indirect taxes tends to increase the revenue for the government, and sometimes government also intends to discourage the consumption of such product, and therefore imposes such taxes. The main reason behind the increase price of the product is the fact that indirect taxes enforced on the producers, eventually increases the cost of production. As a result, producers tend to charge high prices from consumers so that they can compensate for the increased cost. This tax enables the producers to shift the tax burden to the consumers.

It is clear that the increased prices for the cigarettes will directly influence the smokers with low level of income, as they will then have less money to spend on the purchase of the product. However, it does not mean that it will help them quit. In most cases, people with low income will probably start to infringe upon themselves in other expenses to afford cigarettes. It apparent that the main purpose of government is increase the revenue, so in the case if low income consumers keep buying cigarettes, the new revenue for Missouri would be generate at least $283 million a year. The main problem that government should take into account is that people with low income will keep paying the price needed to buy cigarettes but more likely that they are not able to afford necessary therapies that help to quit. 

It is also usually said by the government officials, that this step of government will ensure healthy environment for the public and will force smokers to get rid of the habit. In my opinion, increasing taxes will never give a significant result. Firstly, it should be understood how people starts to smoke. Statistics shows that most people get addicted at a young age. I think that everything comes from family. Most of the habits child gets from family, especially parents. So the reasons for this kind of problem may be different including family’s social status, environment that kid have been grown up in and parents involvement in child’s life. I believe that parents should better look after their children or try to explain the harmful consequences of such habits. As from the government side, people need to be better informed about the dangers of smoking. Necessary regulations regarding sales of cigarettes should be revised. 

From the above discussion it is apparent that the government’s decision to increase the tax on cigarettes will have different impacts. First is the increase in the price, as the imposed taxes are the indirect taxes, which provide producers with the opportunity to shift the tax burden by increasing the price of the products. On the other hand, it is estimated that the demand of the product will sharply decrease, especially for people with low income. The decline in the demand is mainly because of the fact that the demand of cigarette is inelastic to price, in other words, the demand of the product is influenced by change in the price. In the above discussion, different microeconomic concepts are also utilized.