Raising Taxation on Alcohol and Tobacco Products Essay
The controversy surrounding the resolve by the government to increase taxation on alcohol and tobacco products should be seen as an attempt to discourage continued use. Indeed, the decision by the government to impose ‘sin taxes’ on tobacco products and alcohol has become a subject of intense debate from numerous people. Arguments and counter-arguments have been brought forward regarding the consequences of increasing taxation on alcohol and tobacco products. In reality, price increase has pronounced outcome on the level of consumption of tobacco products and alcohol especially to teenagers and young adults. Reliable peer-reviewed studies on economic have clearly demonstrated that increased taxation greatly reduces the rates of consumption of tobacco products and alcohol (Tauras et al., 2001). Nevertheless, the stakeholders in the tobacco and alcohol industries have vehemently opposed tax increases due to the negative implications on the business. Consequently, the decision by the government to increase taxation on tobacco products and alcohol has a direct implication on the level of consumption of such products.
‘Sin tax’ concepts have motivated economists to distinguish between goods with benefits and private costs as well as those that cause externalities. Goods that do not generate externalities are assumed to encourage individuals to make best decisions concerning their welfare and also avoid paternalism. On the other hand, goods that generate externalities on consumption would face extensive scrutiny by consumers if taxes are levied on them at levels equal to the marginal external cost. The externality taxation in the consumption of tobacco products especially cigarettes has particularly been emphasized by economists (Viscusi, 1995). Such economists have argued that there is rationality of ‘sin taxes’ on goods with externalities. There are three main externalities associated consumption of alcohol and tobacco products. Drinking and smoking have been associated with three distinct problems namely: family problems, strain on universal healthcare finance and declines in productivity and wages.
Continued consumption of tobacco products and alcohol often brings extensive strain on the family members. Many consumers of tobacco products and alcohol often suffer ill-health. Ill-health is normally associated with intense distress and pain. Sometimes, users of tobacco products suffer chronic diseases burdening their family members. Other users die prematurely bringing intense grief to their families for losing a loved one. Many times, heavy addicts of tobacco products and alcohol do not care for their families meaning that their responsibilities are left unattended. Sometimes, alcohol brings about intense suffering to families. For instance, alcoholic people bring about violence and injuries to their family members. Additionally, consumption of alcohol and smoking during pregnancy can have very adverse effects on the health of the unborn child for lifetime. Viscusi (1995) argues that such costs can count as externalities depending on the extent to which the family members’ welfare is compromised by the behavior.
Healthcare finance is often universal in many countries. The contribution towards healthcare is often made almost equally by all members. However, behaviors such as smoking and use of alcohol may mean that such people spend more on healthcare compared to people who do not use such products (Smith, 2000). Some healthcare systems such as in the United Kingdom have collective financing. Consequently, the extra cost incurred by smokers and alcoholics is an externality. Similarly, smokers and alcoholics on employer-financed healthcare impose massive burden on such systems. In many cases, there is no perfect differentiation of private insurance on healthcare. In cases where such a differentiation exists higher premiums can impose ‘sin premium’ for consumption of alcohol and tobacco products.
Productivity and wages are also affected immensely by the continued use of tobacco products and alcohol. Reduction in productivity is an externality due to reduction in taxes. Additionally, taxes on consumption are affected by decreased wages leading to lower revenues hence being shared by the society (Smith, 2000). In many cases, employers with no particular measures of differentiating wages fully on productivity basis end up valuing all workers equally. This brings about an externality in two ways. First, there is income externality to employers where wages exceed the marginal product by workers. Lastly, all workers irrespective of productivity level receive lower wages with reduced overall marginal product.
From the foregoing, it is evident that the use of tobacco products and alcohol causes externalities. The behavior has impacts on family members, the universal healthcare financing and the level of productivity. The various problems associated with continued use of tobacco products and alcohol therefore justifies the decision by the government to increase taxation on such products with the aim of discouraging consumption. Indeed, policy measures aimed at discouraging consumption of tobacco products and alcohol use should be encouraged in consideration of the externalities associated with these products. The fact that past data reveals a tendency towards reduced consumption of alcohol and tobacco products especially among the youth supports increased taxation (Johnston, 1981). It is therefore important to consider the negative implications of alcohol and tobacco products use to the society as opposed to the prices associated with increased taxation.
Johnston, M. (1981). Teenage Smoking and the Federal Excise Tax on Cigarettes. Philip Morris USA Memo.
Taurus, J. et al. (2001). Effects of Price and Access Laws on Teenage Smoking Initiation: A National Longitudinal Analysis. Nicotine and Tobacco Research, 4, 605-630.
Smith, S. (2000). How Should Alcohol and Tobacco be taxed? UCL Department of Economics.
Viscusi, W.K. (1995). Tax Policy and the Economy. National Bureau of Economic Research, 9, 1-15.

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