Governments and international health organizations around the world are concerned at the effects on people
from smoking tobacco. One way to reduce smoking is through taxation, but how effective is it?
According to the World Health Organization, tobacco is addictive and harmful to users and others. Every year
around 100 000 people die from smoking-related illnesses in the UK alone. Tobacco use has a knock-on effect
to governments in terms of the extra costs to public health provision. Typically, demand for tobacco is
influenced by three factors: changes in price, real incomes and in tastes and preferences. Legislation on
marketing seeks to change people’s preferences. The UK government has passed legislation limiting the
marketing of tobacco ever since 1965 and this has had some success. In 2016 this will be reinforced with the
introduction of standardized packaging. This makes packets less appealing and helps reinforce health
messages. Increasing tobacco taxation leads to higher prices and can also reduce real incomes, both will have
an impact on consumption, but tobacco is seen to be price inelastic so it requires big price increases to
significantly reduce demand. Both strategies have had some success. Although some 10 million people
smoked in the UK in 2013, smoking rates have more than halved since 1974. Today, 22 per cent of men and
19 per cent of women smoke which compares favourably to the levels in 1974 when 51 per cent of men and 41
per cent of women smoked. Many people believe that taxation is an effective way of reducing smoking,
especially since smoking rates are much higher among poorer people. In 2013, 14 per cent of adults employed
in managerial and professional jobs smoked, compared to 29 per cent in routine and manual occupations.
Any increase in tobacco tax is usually passed onto the consumer since the tobacco industry is an oligopoly.
Therefore to be effective tax increases have to increase prices of tobacco above inflation. Such an increase will
encourage some smokers to quit, make others reduce their consumption and help prevent new users from
taking up the habit.
There is evidence that the numbers smoking shows an inverse relationship to increases in real excise tax on
tobacco from 2004 to 2007. Also, the quantity each smoker consumes goes down with any increase in excise
duty. Overall it is believed that a 10 per cent increase in the price of tobacco will lead to a 4.1 to 4.8 per cent
fall in demand for buying tobacco products in the UK. The reason the drop in demand is not higher Tobacco
crop growing is down to the addictive nature of smoking. Within this figure responsiveness rates are higher for
lower income earners since the share of income spent on tobacco generally falls as people’s incomes rise.