The 'R' Files

Alan Moran

Alan Moran picThe Sot Weed Offensive

The New Puritanism

THE US tobacco companies and the US Government are on the verge of agreeing a US$308 billion 'compensation' regime under which the companies will pay additional sums from their future profits to the US Government. The money will allegedly be earmarked to repay the cost of treating sick smokers. The irony that the payment of the additional sums involves the continuation of the harmful activity has not been lost on many commentators. Nor has the prospect of a new tax gravy train been overlooked in Australia---the South Australian Government is only the first State to react by dispatching its head of taxation to the US.

Many see anti-smoking crusades as a new puritanism. Whereas the liberty to smoke became a defining freedom in the 1960s, by the late 1980s smoke-free offices had become almost universal. These developments have overwhelmingly reflected the changing preferences of the leading cadres of the baby-boomer generation: mostly smokers in the 1960s, they assaulted the citadels of repression; but the vast majority having ceased smoking, and, maintaining an ascendancy over newer generations (many more of whom smoke), they subsequently pushed the pendulum back. And like the puritans of the seventeenth century, they are not content with practicising and preaching purity: they have taken up the instruments of coercion.

In this generational shift of opinion, tobacco phobia has taken on many new dimensions. Prominent lawyer, economist and one-time candidate for the US Supreme Court, Robert Bork, observed, 'A few years back hardly anyone claimed to be seriously troubled by tobacco smoke. Now an entire class of the morally superior claim to be able to detect, and be offended by, tobacco smoke several offices away from their own'.1

The issue of smoking encapsulates a variety of issues. These include:


Government Override of Individual Preferences

Should government have a right to prevent citizens from harming themselves, even when they are fully informed and insured of the risk? In other words, does government have a right to override the individual's preferences and risk profiles? Basically, the answer is that they do not. There are matters on which we support government's overriding individual preferences: compulsory wearing of seat belts and crash helmets are cases in point. But such actions are arguably in place because the distress of accidents to individuals is also shared by others---especially those who may be associated with them.

Similarly, the case in favour of permitting smoking cigarettes can be argued to apply equally to legalizing narcotic use. In all likelihood, tobacco smoking is as addictive as heroin. That said, vast numbers of people, a majority of over 45-year-olds, have ceased smoking. There are, moreover, differences between tobacco and other drugs (including alcohol). Cigarette smoking does not diminish the individual's capacity to engage in any cognitive activity. Both alcohol and narcotics clearly do. Most societies have learned successfully to incorporate alcohol into their social structures, but it is not clear that they would quickly absorb the effects of new such substances. Indeed, alcohol has had pernicious effects on those communities which had no previous exposure to it.


Costs and Benefits of Smoking

One feature of tobacco consumption in Australia, compared with the USA, is the level of taxation. In Australia, taxes on tobacco presently comprise 62 per cent of the final sales price. In the US, taxation is 19--43 per cent of price, depending on the State in which it is purchased. If the average US tax is 31 per cent (and it is clearly less than this as a result of out-of-state purchases and higher rates of smoking in the lower-taxed States), the proposed additional tax of $US12 billion per annum ($US308 billion over 25 years) still leaves US tax rates lower than Australian. In fact, if the US agreement is consummated, average US tax rates would be 57 per cent.

Work for the Tobacco Institute by ACIL2 has sought to calculate the costs and benefits of smoking, and to determine whether the nation as a whole is better or worse off as a result of smoking being both legal and taxed at its present rates.

The ACIL study addresses two economic dimensions of smoking: the overall national benefit, and the question of whether smokers are subsidized for the additional health costs their consumption generates. It estimates the national benefits of smoking at $10 billion in 1995--96, and further that smokers pay in taxation some $3.2 billion more than the extra costs they incur.

Most commentators on smoking neglect the benefits smokers obtain from the product and estimate only the costs. This is akin to arguing that the consumption of fish offers no benefits and that were it to be banned we would make savings in the reduced social costs. Such costs would include the relatively dangerous activities of fishermen causing greater-than-average loss of life and increased surveillance of the seas. For example, Collins and Lapsley's3 estimated costs of tobacco to society are $18 billion when revalued to a 1995--96 basis. But these costs are fully accounted for in the price that purchasers willingly pay for the product, and on top of that price consumers obtain a surplus of $6.6 billion. This represents the amount that consumers value their consumption of cigarettes in excess of their next choice of purchase.4

Nor can it be claimed that the smoker fails to pay her way in the largely nationalized health system. The tax on cigarettes, at $4.2 billion, is offset by additional costs of smokers as a burden on the health system. These costs are estimated by Collins and Lapsley at $462 million, while revenue that might be collected from other goods and services if tobacco were not available is $508 million. Hence, the net annual subsidy from smokers to non-smokers is $3.2 billion.


Impact of Tobacco Taxes

It is also seldom pointed out that tobacco taxes are regressive, that they impact on poorer households more than on richer households. Indeed, they are regressive in the most literal sense in that the actual tax paid as a privilege to be allowed to smoke is higher for the poorest one-fifth of Australian income earners than for the richest one-fifth.

Taxes on cigarettes comprise 62 per cent of the final product price, equivalent to a Wholesale Sales Tax equivalence of 339 per cent.5 The average Australian household pays 1.3 per cent of its income, $9.36 per week, on tobacco taxes. The richest one-fifth of households actually pay slightly less than the average, and this amounts to only 0.6 per cent of their income. The poorest households pay $6.48 per week, but this amounts to a 4.3 per cent share of their income.

There are many reasons for this profile of usage, among them the fact that smoking is more prevalent in younger age-groups, who tend to be poorer as well as more convinced of their immortality! Whatever the reasons, the taxation structure impacts particularly harshly on the less well-off and the fact that this is overlooked by those purporting to be their champions is odd.


Concluding Comments

While the evidence of the harmful effects of tobacco is unquestionable, those effects are confined to the smokers themselves.6 Surveys have shown that smokers are well aware of the risks they take. The very high taxation on the consumption of tobacco is difficult to reconcile with normal taxation principles of equity and efficiency.


1 Bork, R.H., 'Victims in the war on tobacco: smokers', 'Review', page 10, Australian Financial Review, 3 October 1997.

2 Smoking Costs & Benefits for Australia, ACIL Australia, March 1994 and updated October 1997.

3 Collins, D.J., and Lapsley, H.M., The Social Costs of Drug Abuse in Australia in 1988 and 1992, National Drug Strategy Monograph Series No 30, AGPS, 1996.

4 More controversially, ACIL also estimates a 'producer surplus' of $310 million. The existence of such a surplus relies on an assumption that there are certain highly specific assets or skills used in the domestic production of cigarettes.

5 The 'luxury' rate of WST is 32 per cent. The only other goods paying over 100 per cent are distilled spirits, 253 per cent and petrol, 130 per cent.

6 The impact of 'passive smoking' by non-smokers has been demonstrated to be trivial (see Luik J., Smokescreen, IPA, July 1996.)

Dr Alan Moran is the Director of the Deregulation Unit within the IPA in Melbourne