Should cigarettes be linked to CPI?

Most economics textbooks say that governments cannot cut down the smoking rate through price adjustments because demand of the unhealthy products is not reflective of the cigarettes costing more.

Basically, a vast majority of smokers keep smoking despite a spike in price per pack since it is an addiction similar to illicit drugs.

Yet, experts point out that common sense in economics does not apply to the real world a full 100 percent and the correlation between prices and smoking rates is quite strong.

This means that Korea is required to come up with an alternative strategy to reduce the number of smokers ― instead of focusing merely on the expansion of no-smoking areas and carrying out anti-smoking campaigns. It has to push up the cost for smokers through heavier taxes.

Asia’s fourth-largest economy raised taxes on cigarettes by 500 won per pack in 2004 and prices have nearly stayed the same since.

“The smoking rates are closely correlated to cigarette values as demonstrated by the data of the Organization for Economic Cooperation and Development (OECD),’’ professor Lim Byung-in at Chungbuk University said.

“The economic logic that lower prices lead to stronger demand works in the tobacco markets. In order to slash social expenses associated with smoking, Korea needs to lift the amount of won spent to light a cigarette.’’

Among the 30-plus OECD members, Korea ranks 30th in cigarette prices to be burned with the 7th highest smoking rate of 25.8 percent as of the end of last year.

Mexico has a similar problem as the Central American country ranks 28th in tobacco price and third in smoking rates.

In contrast, Ireland sells the most expensive tobacco products and ranks 11th in smoking.

“According to a report from the World Bank, non-price measures would cost 7.8 to 155.8 times more compared to fiscal measures in achieving the same effect on the war against smoking, which will eventually burden taxpayers,’’ a Seoul analyst said.

“The report also says that every time the price of tobacco products rises by 10 percent, the smoking rate drops by 4 percent. In addition, the World Health Organization claimed that the most effective way to curb smoking incidence is to raise costs for smokers through higher taxes.’’

Cold turkey vs gradually

Prof. Lim contends that the Seoul administration government has actually decreased the tobacco value over the past several years because the tax scheme has remained the same since 2004.

Earlier this year a pair of global brands hiked the price of their products by 200 won per pack. The remaining brands are available here at the same price tag of 2,500 won for a package of 20 cigarettes.

“In consideration of inflation, tobacco prices are cheaper now than in 2004 in real terms. As a result smokers are encouraged to continue their habits,’’ Lim said.

“Furthermore, as people’s incomes go up, the proportion of smoking costs in their overall expenditures go down. They hardly have any financial reason to stop smoking. We need to change this incentive system.’’

Then, there would be two options when ratcheting up taxes, either slowly or all at once. Experts argue that the former would be the better way because a sudden sharp increase would invite a backlash such as illicit trading including tobacco smuggling as well as great resistance from the public.

Happy medium ― CPI-linked taxation system

To phase in taxes, Lim suggests that cigarette prices should be aligned with the consumer price index (CPI), which he says worked effectively in such countries as Australia.

In 1983, Australia introduced the CPI-linked taxation system, under which tobacco taxes are adjusted in February and August every year to reflect the rise in consumer prices.

A survey conducted there every three year shows that smoking dipped to 16.6 percent in 2007 from 21.8 percent in 1998 and the size of the tobacco market shrank to 22.7 billion cigarettes from 27.5 billion during the same period.

Deterrents in introducing the CPI-linked taxation system are that the Lee Myung-bak administration has tried to seek policies benefitting the lower class and is concurrently grappling with high inflationary pressures.

“The incumbent administration has sought to avoid the image of being friendly to the haves rather than have-nots. Accordingly, it would be difficult to raise the price of tobacco as smoking is more common among the middle and lower classes than the rich,’’ Lim said.

“It also worries about the soaring inflation rates of late. Topping other things off, however, the government should think of high social costs caused by smoking. It has to put first health of the general public rather than political and economic causes no matter what they are.’’

By Kim Tae-gyu

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