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Analysis of exise duty. Japanese Policy of Tobacco Tax

Seminar Paper 2011 19 Pages

Economics - Case Scenarios

Excerpt

Table of Contents

Executive Summary

List of Abbreviations

List of Figures

List of Tables

List of Equations

1. Introduction

2. Tobacco Tax policy in Japan

3. Economical Aspects on Tobacco Consumption and Taxation in General
3.1. Equilibrium
3.2. Elasticity
3.3. Calculation of revenue behavior versus taxation

4. Tobacco Tax Strategies
4.1. General aspects
4.2. Increase of tax revenue
4.3. Discourage smoking

5. Personal View

6. ITM Checklist

Bibliography

Executive Summary

Governments are trying to motivate people quite smoking with various bans and anti-smoking campaigns but still try to “milk” smokers with tax hikes on tobacco products.

This assignment is describing the Japanese tobacco tax policy which has seen just recently, 1st of October 2010, a major change. As Japan is the only developed country in the top ten smoking statistic, with a male smoking rate of close to 50%, the Japanese Ministry of Health, Labor and Welfare has pushed and driven a 40% tobacco tax hike with the aim of discouraging smokers. Further on, economical aspects on tobacco consumption are analyzed in general and with respect to tobacco tax hikes. The relations are explained on supply and demand curves utilizing given elasticity factors of tobacco demand from the OTC.

Due to the rather inelastic demand of tobacco which is mainly supported by its addictive nature, tax raises will have different effects depending on the age of smokers but mainly depending on social aspects. A tax raise will cause a higher quite rate in developing countries with a low or mid income such as China for instance compared to developed ones like Japan. On the other hand, in developed countries the gain in tax revenue will be higher compared to developing countries.

At the end of the assignment tax strategies aiming for higher tax revenue or aiming for a lower smoking rate are discussed besides general aspects.

List of Abbreviations

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List of Figures

Figure 1: Smoking any tobacco product, %, Males

Figure 2: Smoking any tobacco product, %, Females

Figure 3: Smoking Rates (Percentage of Adult Males)

Figure 4: Risk factor tobacco use – WHO MPOWER report

Figure 5: Supply and demand behavior of cigarette consumption

Figure 6: Change of revenue due to tax raise

Figure 7: Sum of Revenue change due to tax raise for equally distributed elasticity factors

Figure 8: Laffer curve

List of Tables

Table 1: Calculation of decrease in cigarette consumption due to price raise

Table 2: Change of Revenue with respect to tax raise

List of Equations

Equation 1: Definition of Elasticity

1. Introduction

As a study of the WHO, done in 2008, shows (WHO-Tobacco) most male smokers live in development countries with low or mid income such as Mongolia or China for instance. The study also shows that the number of female smokers in those countries is significantly lower whereas in developed countries a higher percentage of smoking women can be observed.

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Figure 1: Smoking any tobacco product, %, Males[1]

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Figure 2: Smoking any tobacco product, %, Females[2]

Furthermore, the study shows that the Japanese culture is an exception from this rule, a highly developed country with a smoking rate of around 47% for men respectively close to 14% for women. As comparison China with 67% and Germany with 37% male respectively 4% and 26% female smokers.

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Figure 3: Smoking Rates (Percentage of Adult Males) [3]

From a worldwide perspective the WHO report from 2008 forecasts an increasing number of smokers from 1.1 billion in 1998 to around 1.3 billion in 2010 due to population an income growth.

According the WHO MPOWER report 2008 is tobacco the single most preventable cause of death in the world today. In 2008 tobacco consumption has killed more than 5 million people, more than tuberculosis, HIV/AIDS and malaria together. Within the next 20 years the number will further increase and probably exceed 8 million per year.

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Figure 4: Risk factor tobacco use – WHO MPOWER report 2008

2. Tobacco Tax policy in Japan

1st of October 2010 the Japanese tax on tobacco increased the first time in four years and the fourth time since 1998. The price for a single cigarette went up due to taxes in 1998 and 2003 by 0.82 Yen each time and in 2006 by 0.852 Yen. The mark-up of 5 Yen per cigarette in 2010 was different for two reasons. Firstly, the tax rise of 3.5 Yen per cigarette was much higher than in the past and it was mainly driven by the Ministry of Health and unlike before from the Ministry of Finance. Secondly, on top of the 3.5 Yen tax rise, a higher tobacco leaf price contributes with 1.5 Yen per cigarette which resulted together in a 100 to 140 Yen higher price for a pack of cigarettes which is with 400 to 440 Yen, around 4 Euro, still cheaper than in Europe or North America.

"The aim is to encourage smokers to quit," Kosuke Kato, a health ministry official, told Associated Press. "We hope the price increase will discourage smokers from buying cigarettes and eventually help them quit smoking." He further mentioned in the interview that the tobacco tax hike will probably not be the last one, as the Ministry of Health, Labor and Welfare is looking to keep increasing taxes on tobacco products until Japanese rates are equal with those in Europe and North America.

Unlike the Ministry of Health, the Ministry of Finance worries about further tobacco tax increase because of potentially lower tax revenue as people quit smoking respectively due to increase of smuggling, both related to higher cigarette prices.

3. Economical Aspects on Tobacco Consumption and Taxation in General

From an theoretical point of view tobacco sales and consumption has to be treated as consumption good following a typical supply and demand behavior.

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Figure 5: Supply and demand behavior of cigarette consumption

An increase in price would lower the number of sold and consumed cigarettes and vice versa as shown in Figure 5.

Based on this model and behavior an expected tax revenue can be calculated for various cigarette prices and taxation models. For the calculation itself the price elasticity of consumed cigarettes respectively in general on tobacco demand has to be defined.

3.1. Equilibrium

Equilibrium is defined as the price and quantity at which quantity demanded and supplied are equal (Boyes and Melvin 2008). At the point of equilibrium neither a scarcity nor an oversupply of a good exists.

The equilibrium price defines the price a buyer is willing to pay respectively a seller is willing to sell. Any shift of this price will cause a shift in the demand and supply curve and either a scarcity or an oversupply will be generated.

3.2. Elasticity

Elasticity describes the percentage change of a dependant variable in response to a percentage change of some independent variable (Mankiw 2009). The elasticity η is defined as follows

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Equation 1: Definition of Elasticity

If the absolute value of the elasticity factor η is greater than 1 the demand is elastic and it is inelastic for values below 1. An elastic demand is price sensitive whereas an inelastic one is not or less responsive.

3.3. Calculation of revenue behavior versus taxation

Based on the OTC, the office for tobacco control (www.otc.ie), the elasticity of tobacco products, especially cigarettes, is relatively low at about 0.4 to 0.6. In this case a low sensitivity in price changes, commonly referred to as an inelastic demand, can de expected supported by the addictive nature of tobacco. However, a social gradient has to be accounted in these data as well. While for higher income groups the elasticity is even lower, around 0.2 to 0.3, it increases for groups with a low income to 0.8. In addition, teenagers and younger people are also more sensitive to price raises than adults are.

Based on the elasticity formula and values given above the theoretical tobacco respectively cigarette consumption behavior with respect to price raises can be calculated.

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Table 1: Calculation of decrease in cigarette consumption due to price raise

Additionally to the decreased cigarette consumption the effect of revenue change due to tax raise can be determined as well as a theoretical optimum with respect to a maximized tax revenue as shown in Figure 6 and Figure 7.

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Table 2: Change of Revenue with respect to tax raise

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Figure 6: Change of revenue due to tax raise

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Figure 7: Sum of Revenue change due to tax raise for equally distributed elasticity factors

The sum of change in revenue, tax and good, as shown in Figure 7, follows the Laffer curve (Figure 8) which describes in economics a theoretical representation of the relationship between government revenue raised by taxation and all possible rates of taxation (Arthur Laffer 2004). It is used to illustrate the concept of taxable income elasticity where t* represents the rate of taxation at which maximal revenue is generated.

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Figure 8: Laffer curve

4. Tobacco Tax Strategies

4.1. General aspects

Taxation on tobacco can be a double-edged sword. On the hand-hand side higher tobacco taxes can increase the government tax revenue but with the risk of an increased smuggling rate which can in turn cause a drop. Higher tobacco taxes can also motivate people to quite smoking which is again on the one hand side beneficial for the economy system due to less smoking breaks during work and less sick days but risks on the other hand destabilization of a complete industry and increase potentially the rate of unemployment.

Further on, also with respect to an increase of tobacco taxes, the total cost of smoking has to be considered. Not only the buying price for a pack of cigarette is of importance but also the indirect costs has to be considered. As indirect costs of smoking morbidity costs, loss of income and direct medical care, or reduced productivity, smoking breaks and sick days, as well as indirect medical care has to be accounted. As a matter of fact, non-smokers are indirectly subsidizing smokers by financing the indirect medical care part of smokers and with respect to working conditions non-smokers have to work comparably more due to the missing smoking breaks and less sick days.

Generally, the burden of a tobacco tax raises is carried out to consumers and producers at the same time. The consumer has to pay more where at the same time the producer is selling less. Depending on the elasticity factor of the country the producer is more or less affected whereas in general, due to the addictive nature of tobacco, the main part is covered by the consumer especially in developed countries such as Japan.

4.2. Increase of tax revenue

Aiming for a higher tax revenue an increase of tobacco taxes is helpful as shown in Figure 6. Therefore, a further increases of tobacco taxes can have a progressive rather than a regressive effect.

With respect to Japan, a highly developed country with relatively high income rates, the additional load of extra taxes falls proportionately more on higher income groups which stands for a elasticity factor lower than average, meaning less sensitive to price changes. Due to the inelastic demand factor of tobacco in Japan, the number of smokers will only slightly decrease after a tax hike so no major impact in the economic systems such as an increase of unemployment due to dramatically low tobacco demand can be expected.

4.3. Discourage smoking

In order to prevent smoking a tax raise might be useful but mainly addresses younger people and groups with low and mid income which are referring to a higher elasticity factor. A tobacco tax raise will increase the threshold to start smoking but will have limited effect at groups smoking since 5 years or more.

For a discouraging smoking strategy a tax raise in combination with other actions such as smoking bans in public buildings, restaurants and streets plus a ban of cigarette ads might be a suitable way.

In Japan a combined strategy, a raise in tobacco tax and various bans, has been introduced in the last month and years. Around half of the office buildings are following a smoke-free policy already whereas in public buildings smoking is already forbidden. On streets and sidewalks in big cities smoking is “not suggested” and only partly forbidden and in most of the restaurants and pubs not smoking is banned but smoke-free zones are installed which means in total a first step to lower the smoking rate is done but there’s still a big step ahead in order to discourage smokers in Japan.

5. Personal View

From a personal point of view taxes on tobacco products should be further increased for the following two reasons. Firstly, the additional money should be used for anti-smoking campaigns and to cover costs caused indirectly by smokers. Secondly, a higher tax rate, a higher price per pack of cigarette, will increase the threshold level for following generations to start smoking worldwide and will lower the number of smokers in a long term view, especially in development countries.

[...]


[1] http://en.wikipedia.org/wiki/File:Male_Smoking_by_Country.png

[2] http://en.wikipedia.org/wiki/File:Female_Smoking_by_Country.png

[3] http://www.unnaturalcauses.org/assets/images/interact_chart_smoking_rates.gif

Details

Pages
19
Year
2011
ISBN (eBook)
9783656496472
ISBN (Book)
9783656497486
File size
1 MB
Language
English
Catalog Number
v233252
Institution / College
University of applied sciences, Munich
Grade
1.7
Tags
Economics Japan Tobacco Tax OTC WHO

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Title: Analysis of exise duty. Japanese Policy of Tobacco Tax