25 Jun 2013
The industry sometimes argues that any tobacco tax increase is counterproductive, since if tobacco taxes decrease consumption, they will also lead to a decline in revenue. Sometimes this is dressed up with some fancy talk about “Laffer Curves”16. More often, the industry and its allies warn against “killing the goose that lays the golden egg”.
- Data from multiple countries shows increasing revenue with increased taxes, even while consumption is declining. Show your finance contacts the graphs demonstrating this — you’ll find them in Appendix 1.
- There is a low price elasticity of demand for tobacco products. Studies around the world have almost universally shown that a given tobacco price increase leads to a less-than-proportionate drop in consumption. For example, in rich countries, a 10 percent increase in price leads to a drop in consumption of only 4 percent. The drop is likely to be somewhat larger in poorer countries, but is consistently less than 10 percent.
- In the longer term, it is of course our hope as tobacco control advocates that we will be so successful at reducing tobacco consumption that tobacco tax revenue will begin to decline. However, this is likely to take several decades, at which point countries will have started saving money on direct and indirect costs as a result of declining tobacco use.
16The term “Laffer Curve” is often used with respect to income tax, and refers to the idea that tax rate increases beyond a certain level lead to declines in revenue – at a 100% income tax rate, nobody would have any financial incentive to work at all, for example.