Increased taxes on cigarettes Essay

Increased taxes on cigarettesIntroduction            Taxes are financial charges imposed on goods, services, income, revenues and organization by the legislative authority.

Taxes are mainly intended to generate revenue to finance government expenditure. Taxes are not voluntary contribution but rather compulsory contribution to the state and are classified as either direct or indirect. Other than to finance government expenditure taxes are levied for other specific reasons: to regulate consumption of certain good or service, to ensure even distribution of income among the citizens and as tool in fiscal policy. Specific taxes on specific goods affect the demand and supply of those goods.

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Taxes on cigarettes are aimed at reducing the level of cigarette smoking among the citizens. As we all know that cigarette smoking is harmful to our health1. Will cigarette taxes have effect on demand for cigarettes?            Indiana stated is “ranked second among states in adult smoking rate with 27.3 per cent smoking rate” (Chaloupka and Christensen). Despite much efforts by the federal government to reduce the number of youth smoking more youth are still smokers. Cigarette smoking is associated with diseases such as lung cancer and heart disease. “In 2001, Indiana states reported more than 10,000 deaths caused by tobacco use” (Chaloupka and Christensen). Cigarette smoking has a lot of social and economic costs affecting both the active and passive smokers such as high medical costs, reduced productivity and high insurance covers.

The Indiana state government increased excise tax on cigarettes as policy to reduce the number of smokers and smoking rates. Increased taxes increases prices of the cigarettes and as the law of demand states increase in price of commodity reduces its demand and hence reduced consumption. Therefore the Indiana government expects cigarette smoking rates to fall by a certain rate. The smoking rate may fall or remain unchanged because of the price elasticity of supply and demand of the cigarettes. If demand is more inelastic in respect to supply the tax incidence fall on the buyer hence the demand falls.Price                                      Supply curve                                                   Demand curveQuantity: Dd/Ss  2.

Other effects of increase in taxes on cigarettes.            An increased tax on cigarettes has other economic and social effects. Value added taxes on goods increase cost of production as producers seek to maximize profits. Increased taxes on cigarettes is first felt by the producer who transfers the increased cost of production over to the consumer through increased retail price. Increased cost of production might reduce the total production. Marginal cost is the increase in cost of producing one more unit of output. As cost of production increases, marginal cost increase at a decreasing rate.

On other hand marginal benefit is benefit accruing from additional consumption of one unit of commodity. Reduced cigarette consumption reduces marginal benefits. Therefore changes in prices of goods caused by increased taxes affect both marginal cost and marginal benefits. Reduced cigarettes smoking reduces its related diseases and hence the cost of treatment.

This funds once used in treating tobacco ailments is used for other purposes.            The figure below shows the relationship between marginal cost and marginal benefit.3. Uses of money generated from increased taxes on cigarettes            As result of increased taxes on cigarettes, the Indiana health department reports that about half of the drop in cigarette smoking is as result of increased prices due to increased tax. The department estimates that tax on cigarettes generates more than 280 million US dollars annually.

“The state of Indiana spends 2.03 billion US dollars annually in treatment of tobacco related diseases” (Chaloupka and Christensen).Conclusions            From economic point of view increased prices will reduce demand for that good. The effects on taxes depend on the elasticity of demand and supply.

“Elasticity of demand and supply is the responsiveness of demand and supply to changes in own prices” (Samuelson and William 147). Consumer demand changes depending on prices of that good he wants to buy. If elasticity is 1, it shows that demand is highly affected by the changes in price of that good and if less than one it means demand for a good is not more sensitive to changes in price. Therefore the tax on cigarettes will be effective with respect to elasticity of demand for cigarettes. If demand is inelastic in relation to supply then the tax burden will fall to consumers and if the supply is inelastic in relation to demand the tax burden will fall on the seller. If demand for cigarette is more elastic then any increase in tax which increases price will lower demand for cigarettes.

However, if demand for cigarettes is inelastic any increase in prices due to increased taxes will not change cigarettes demand hence the tax will not have any effect.Works cited.Chaloupka, J. Frank and Christensen, Karijo. November 2006. State cigarette tax increase would cut smoking rate and ease cost.

Identifying choices and supporting action to improve communities. November 18, 2008<>Samuelson, Paul A and William D. Nordhaus.

Economics, 17th edition, McGraw-Hill. 2002: 147.


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