International nongovernmental organizations like WHO has been pressurizing governments to put in place policies which will reduce the number of smokers. Several governments have opted to increase tobacco excise tax as the main policy of decreasing smokers. In view of policy makers, increased cigarettes tax leads to increased retail prices because sellers pass the increased tax burden to smokers. It is widely acknowledged that increased price of a commodity leads to decreased demand because many people may not be able to afford the commodity. However, this objective may not be attained with ease because long run smoking is addictive, hence, people who are addicted may find it difficult to quit smoking despite the increased price. Therefore, increased excise tax on cigarette smoking should carefully be researched to prove whether it will achieve government objective of decreasing number of smokers as well as raising government revenue.
A research was carried out by Massachusetts Institute of Technology on how increased excise tax on cigarettes affects number of smokers both young and adults in Michigan. This research showed that, increased excise tax on cigarette has different impact on young and adult smokers. The research paper was published in the Michigan journal of business. The researchers came up with a regression model comprising all the variables which may influence the number of smokers’ in a country i.e. Gross domestic income, consumer price index and taxation. Gross domestic income gives the overall state annual income; consumer price index gives the trend of changing prices in a state. The reason of including this other two variables is because they affect consumers’ spending habits.
Summary and Analysis
The researchers made use of data from forty nine states plus the District of Columbia from 1986 to 2006. Maximum of 1050 observations were made. The regression model is formulated such that the dependent variable is total number of smokers. While the independent variables are tax, gross domestic product and consumer price index. Mainly, the data on independent variables was obtained from department of commerce bureau of economic analysis. The reason why the researchers did not just consider tax as the only variable affecting number of smokers is because money spend on a commodity reduces individual’s level of income which has a close relationship with national level of income (Sylvain,25). In addition, consumer price index is incorporated because as the price of cigarettes increase due to increase in taxes, the price of other commodities changes. It is therefore myopic to only determine correlation coefficient between number of smokers and change in excise tax. Therefore, the following was the regression used to determine total smokers
Smokers i,t=β1log taxi,t+β2 logGDPi,t+β3 C P Ii,t
The researchers then carried out a regression analysis to obtain β1, β2, β3 I.e the coefficient of tax, GDP, and CPI which indicate how each of this factors influence the total number of smokers. If a coefficient is negative, then it will imply that the factor negatively influences the number of smokers. This coefficient should range from zero to one (without considering the sign). A high coefficient indicates that the respective variable has high influence on number of smokers (Sylvain, 31).
The regression analysis was carried out and it was found that β1 i.e. the tax coefficient was -0.38. This means that excise tax on cigarettes has a negative influence on number of smokers. However, the influence is not very significant i.e. the extent to which the number of smokers can be predicted by excise tax is -0.38. This low negative coefficient allowed the researchers to be suspicious that the number of smokers may decline but the revenue raised by government through taxation may increase because the increase in tax may be more than the size of decline of number of smokers.
The research model can also be used to determine how the other variables i.e. consumer price index and gross domestic income. The researchers found a strong negative correlation coefficient of- 0.6 between consumer price index and number of smokers. This shows that as consumer price index increases it is likely that the number of smokers will decrease drastically. This because many people may consider smoking a luxury and prefer to allocate their income in more pressing wants.
The relationship between number of smokers and GDP was found to be +0.03. Therefore as the peoples income increase it is likely that their smoking tendencies will increase overtime. The researchers attributed this to small proportion of income which can be spent on cigarettes.
When all the coefficients are obtained the model appears as:
Smokers i,t = -0.38 log taxi,t+ 0.03 GDPi,t -0.6 C P Ii,t
Despite the weak relationship between excise tax and number of smokers, it is likely that the number of smokers has been falling drastically over the period of research. The researchers associated this to increased awareness of the negative implication of smoking. Therefore, the researchers found that the government can achieve its objective of decreasing number of smokers if it allocates more fund to the antismoking campaign. In addition, young people who could be looking forward to start smoking may find it difficult due to increased cigarettes prices.
Determining the effect of increasing excise taxes on cigarette smoking is important to policy formulators in every country. The government should use the result to determine whether it will achieve its objectives which may be: to decrease smoking preference among citizens and raise government revenue.
The regression model shows that taxes have no significant effect on number of smokers in USA. This is because many of smokers are already a dictated to nicotine and find it easier to pay for the increased price rather than quitting smoking. In economics it can be said that, smokers have low price elasticity of demand of cigarettes. This low price elasticity is attributable to the small proportion of cigarette expense on smokers’ total income. This makes policy regulators conclude that consumers of addictive goods are not rational in making their consumption decision. Therefore, there is a need to allocate more funds in raising awareness of the negative impacts of smoking as well as establishing rehabilitation centers for addicted smokers. This is because the probability of number of smokers decreasing as a result of increased excise tax is -0.38.
Sylvain, Serginio . "The Effects of Excise Tax on Cigarette Consumption: A Divergence in the Behavior of Youth and Adults." Michigan Journal of Business 1.2 (2008): 25-55. Print.