Tobacco, tax increase and tobacco industries: A conundrum

Recently, people raised the demand that the government should raise the tax on tobacco to such an extent that higher tax compels people to lower consumption of tobacco products. Some strongly supported this step and expressed highly optimistic view that higher taxes will decrease consumption of tobacco. Apparently, this seems true and our naked observation can confirm the negative relation between tax and tobacco consumption.
However, this apparent negative relation is what baffles us.  The perplexing fact is: why do tobacco industries exist? The answer to this question must be found before we say anything about the observed negative relation between tax and tobacco consumption. The reason is that naive statistical relation between tax and tobacco consumption can blind us in such a way that this negative relation, which is thought to be a boon, can turn out to be completely a bane and utter curse for us. Moreover, higher price of cigarettes and tobacco in general makes the matter worse, not better.
As for the statistical relation, there is something more puzzling. What would the 'time series data' taken over a long period say about the effect of tax on tobacco consumption? It may appear that over the long period of time, effect of the single event of tax increase loses steam and no permanent effect exists at all. If this is true, then what is the point of increasing tax on tobacco? What makes tax a popular instrument for governments to present misleading statistics that tax increase decreases tobacco consumption?
BLINDED BY NEGATIVE RELATION AND STATISTICS: People often cite evidence that tax increase decreases tobacco consumption. An article published in The Financial Express on 31st May, 2014, pointed out that a tax that increases tobacco prices by 10 decreases tobacco consumption by 4.0 per cent in high-income countries and by 8.0 per cent in low- and middle-income countries. This raises a question: what is the validity of such negative relation? First of all, the observed negative relation is true, but this relation doesn't give any significant clue to raising the tax. Why is that? To make a sense of the illusive character of the negative relation, we can examine time series data.
For example, if we divide time in several epochs according to the epoch of tax increases and then aggregate the impact of tax on tobacco consumption to see whether the consumption of tobacco consumption at the end of the last epoch of tax increase is significantly different from the consumption of tobacco before the first epoch of tax increase, we can have some idea about what kind of impact tax can have on tobacco consumption.
To say more concretely, let us note that the first tax increase happened in 1992, the second in 1998, and the third occurred in 2006. Now we have to aggregate the data over the three periods of tax increases to see whether tobacco consumption is significantly different from the consumption of tobacco before the first tax increase in 1992. It may turn out that each tax increase event can be accompanied by decreased tobacco consumption, but overall there is no decrease at all even after adjusting for the number of population and the other factors.
The fact is that after the increase in tax in 1992, we can observe that consumption of tobacco decreased. Similarly, the same thing can be observed for 1998 and 2006 events of tax increase. But the objective is not only to see the immediate effect of tax increase on tobacco consumption, but also to see whether the effect is sustainable or not.
We argue that time series data taken over a handful of epochs of tax increases will hardly show any decrease in tobacco consumption. If this is so, then what is the point of raising tax on tobacco? We can't support tax increases to decrease tobacco consumption since the effect of this measure washes way over time keeping consumption of tobacco in the same position as it was before.
TAX AND THE EXISTENCE OF TOBACCO INDUSTRIES: The answers to the above-mentioned puzzles require the answer to another riddle: why do tobacco industries exist? The most astonishing and counterintuitive answer is that taxation helps tobacco industries survive. This is totally contradictory to the usual belief that tax on tobacco acts as a deterrent to tobacco consumption. If tax on tobacco acts as a resistant to its consumption, how can tax on tobacco explain the existence of tobacco industries? To conceptualise the relation, we can imagine a situation like this.
Let's assume that there exists a country in which the government by any rule is forbidden to collect taxes on tobacco products. That means no taxes on tobacco products. Zero-tax means the government doesn't receive any revenue from tobacco production. Now what will this government do if it is restricted by law from collecting revenue from tobacco production? The government can take two decisions: It can either allow free and unrestricted production of tobacco or put total restriction on tobacco production since the existence of tobacco production doesn't add to any social benefit whatsoever in the eyes of it. We argue that a rational government will hardly adopt the first option in the face of zero-tax on tobacco products. In the case of no taxation, no government will be willing to support the existence of tobacco industries. So, the explanation for the reason of existence of tobacco industries is clear.
Taxes on tobacco help tobacco industries to survive year after year. This indicates that the higher the tax on tobacco, the higher the chance of survival of tobacco industries. This is the cruel truth. The usual belief that taxes curb tobacco consumption is a superficial view, but the reality is taxes help tobacco industries continue in our society. Over the years, tobacco industries have used taxation as a weapon for their survival and the government has assisted in that. Some years ago a person told this writer that the British American Tobacco (BAT) pays huge amounts of taxes to the government. Then the writer replied that it is because of this that they exist. Tobacco industries all over the world have used taxation as the sole weapon for their existence and they had discovered this 'cruel truth' long before we realised. This is the one reason why tobacco industries hardly say anything when taxes are raised on their products. They know it very well that over time the impact of increases in tax will be neutralised and tax will have no effect on their production in the long run except for some short-run reduction in consumption.
Also they know that the higher the amount of taxes they pay to a government, the stronger the chance of their survival becomes. Stronger chance of survival means that they can continue their production just by paying taxes to the government. Therefore, it is clear that the higher the amount of taxes, the higher the production and consumption of tobacco. This runs totally counter to our usual and naked-eye observation that higher taxes reduce tobacco consumption.
As we have emphasised above, the negative relation is related to a single event of tax increase which washes away over time. For example, if taxes on tobacco are raised in 2014, then we can see an immediate reduction in tobacco consumption shortly after the price increase due to increase in tax.  But the effect of this tax increase will disappear over the time, and in 2020 we will not be able to observe any effect of such tax increase on tobacco consumption.
What the tax increase in 2014 will do is that it will make the presence of tobacco industries stronger and their influence will increase significantly in proportion to the increase in taxes. People think that tax on tobacco is a boon for a society since it curbs tobacco consumption, but the irony is that tax on tobacco is the curse that we have been bearing for long.
We can more clearly present the above analysis as follows. The conventional belief that tax reduces tobacco consumption means tax and tobacco consumption is negatively reduced. But we have said that higher taxes make the presence of tobacco more persistent. Higher persistence is measured by the proportion of tobacco taxes in total tax revenue collected by a government. The higher the share of tobacco taxes in total tax revenue, the stronger the persistence of tobacco industries will be and vice-versa. So, we say:


In the figure I, tax on tobacco (t0) is measured on the horizontal axis and the consumption of tobacco (CT) on the vertical axis. The graph shows that as the tax increases, consumption of tobacco decreases and as it decreases, consumption increases. On the other hand, the figure II shows that as the proportion of tax revenue collected from taxes on tobacco (R) increases, consumption of tobacco increases and vice-versa.
The upward rising positive relation between R and CT indicates that the negative relation between tax and tobacco consumption is fictitious and fake. Our first hand and naked-eye observations tell us that tax decreases consumption of tobacco. But in fact it increases the consumption of tobacco perpetuating the existence of tobacco industries.
Now since R and t0 is positively related; as tax on tobacco increases, the proportion of tax revenue collected from taxes on tobacco increases. We can derive the positive relationship between tax and tobacco consumption as follows:


The figure III shows that higher level of tax on tobacco leads to a higher amount of tobacco consumption. At zero-tax on tobacco, consumption of tobacco is zero. The upward rising relation is derived from the idea that tax revenue collected from taxation on tobacco products makes tobacco industry enduring and more persistent. Such endurance and persistence of tobacco industries are due to taxation.


The higher the tax on tobacco products, the stronger the existence of tobacco industries becomes -- which ultimately implies higher production and consumption of tobacco items. Thus, we have the positive association between taxes and tobacco consumption.
CONCLUSION: The common belief that tax decreases tobacco consumption seems to be a deceptive truth. The fact is that taxation on tobacco helps tobacco industries endure and that tobacco industries over the years have utilised taxation as a survival weapon in society. We argue that in a world with no tax on tobacco products, tobacco industries would hardly exist. If this is true, then raising tax on tobacco means perpetuating the existence of tobacco industries. For this reason, tax on tobacco products is not a boon, but a bane that we have been bearing for a long time. The government has been a vital part in this cat-and-mouse game of tobacco control.


Taxes on tobacco products are like baits, which tobacco producers put in front of a government. The greed for tax money has led us to this situation today. That is why those who want to stop consumption of tobacco should raise concern in the right direction, not in the wrong one saying that government should increase taxes on tobacco to curb tobacco production. Instead of raising the demand for higher taxes on tobacco to prevent tobacco consumption, we should rather say 'no tax' on tobacco. Only zero-taxation on tobacco can put a halt to tobacco consumption since zero-taxation means zero-tax revenue from tobacco production.
Taxation on tobacco is an impractical and harmful act, and the governments all over the world have long been engaged in it.
The contributor writes from the University of Denver, USA.
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