Pages

Sin tax myths – why smokers reduce health costs

Smokers have been the target of Australia's latest sin tax. Meanwhile, debate continues over using sin taxes to reduce consumption of 'unhealthy' foods such as soft drinks and confectionary.

(The word unhealthy is used quite loosely due to the fact that there is sufficient uncertainty about health – Are eggs good or bad these days? Margarine? – and because it is typically not the food itself, but the quantity consumed of a single food that is unhealthy.  Almost any food item consumed in excess will be unhealthy).

The primary arguments in favour of sin taxes are that
1.      the taxes reduce ‘harmful’ or ‘unhealthy’ consumption, and
2.      the taxes raised offset likely health costs such behaviours incur on others.

Unfortunately neither argument is compelling.


The price elasticity of demand for a sin taxed good will determine the decline in consumption of the apparently harmful product.  If demand is highly elastic, meaning that quantity of the good people choose to consume is very sensitive to price, then a tax may significantly reduce consumption. 

However, demand is typically only highly elastic when there are many substitutes available.  For example, demand for petrol is inelastic because there are no alternatives, while demand for cornflakes is probably much more elastic because of the wide range of alternative breakfast cereals.

This means that if the tax is effective at reducing the ‘harmful’ taxed consumption, it is promoting consumption of some alternative.  So what alternatives are out there?  The following example is typical of the type of offsetting behaviour I would expect.

Research has shown that when the price of a "sinful" good increases, consumers often substitute an equally "bad" good in its place. For example, two studies found that teen marijuana consumption increased when states raised beer taxes or increased the minimum drinking age. Another study found that smokers in high-tax states are more likely to smoke cigarettes that are longer and higher in tar and nicotine than smokers in low-tax states. Specifically, they discovered that young adults aged 18–24 are much more responsive to tax changes than older smokers. For young smokers, the switch to cigarettes with higher tar and nicotine is so large that tax hikes actually increase average daily tar and nicotine consumption.

One could easily imagine how similar substitutions would occur with soft drinks, perhaps leading to increased consumption of alcohol (forget the Coke, give me a beer).

The second argument in favour of sin taxes is that people who consume in an ‘unhealthy’ manner cause a greater financial burden on society by forcing others to pay for medical treatment of conditions stemming from such consumption, especially in most first-world countries with government-funded healthcare, and should be taxed extra to pay for the costs of their treatment.

This is absurd for two reasons. 

First, the logical extension is that government should also tax other risk-taking behaviour, such as driving or lying on the couch all day, while subsidising healthy foods and ‘acceptable’ behaviours with the purpose of decreasing the financial burden of health care.  It is the greatest excuse for government fund raising discovered.

A line needs to be drawn between medical intervention and freedom of choice. I have noted before that when Queensland decided to add fluoride to the drinking water, that line was crossed – akin administering medical treatments without consent.

The second reason to oppose sin taxes is that health care costs are not typically reduced by living a ‘healthy’ life but are likely to be increased. This is best explained as follows (my emphasis):

It’s easiest to think of smoking as bringing forward a whole lot of end of life costs. Smokers die earlier than non-smokers. We know that. And the costs to the health budget of somebody who is dying are rather higher than the costs of somebody who is healthy. But everybody dies sometime and most of us will incur end of life costs that will be paid for by the public health system.

Suppose that a smoker will die at age 65 and a non-smoker will die at 75. Comparing 65 year old smokers to 65 year old non-smokers and calling the difference the cost of smoking then rather biases upwards the measured costs of smoking; we ought to be comparing the health costs of a smoker dying at age 65 with the health costs of a non-smoker dying at age 75. And, perversely, the deadlier cigarettes are, the greater will be this bias. The younger smokers are when they die of smoking-related illnesses, the greater will be the measured cost difference between smokers and non-smokers because a smaller proportion of comparable non-smokers would be incurring end of life costs.

The figures assume that in the absence of smoking, smokers would never have imposed end of life costs on the health system. But for their smoking, all smokers would have died of a sudden, and cheap, heart attack and would only have had average health costs up to that point. That’s clearly nonsense

So there you have it. Sin taxes are simply the latest revenue grab disguised as socially beneficial and fiscally responsible.

(No, I don’t smoke, and I eat a fairly ‘healthy’ diet, yet I don’t see why people need to be punished for the way they consume their calories, while being free to expend them in any risk taking manner)

7 comments:

  1. I was under the impression that smoking tax revenue more than offset the extra cost of smoking related medical costs.....

    ReplyDelete
  2. Hi Cam,
    My first read of your blog. Enjoyed the discussion. Some comments:

    •In regards to your statement about petrol having no substitutes, gas is a substitute.
    •With regards to cereals, not only are there a large range of cereals available, more importantly to your point, is that there are numerous direct substitute products, that is products the same as corn flakes, which compete on price.

    •Is Nicorette and the like considered alternative products to cigarettes? Also, part of the issue with taxes on cigarettes is that it is a good with highly inelastic demand which is partly driven by an addition for nicotine. Thus the nature of elasticity differs between products.

    •With regards to your comments regarding younger and older smokers, I think the point I made above is key to understanding your point. Movements in consumption patterns of younger smokers are possible or more likely due to the fact that they are less addicted. Part of the reason they smoke is probably due to peer pressure. Whether they smoke a cigarette that is high in nicotine or low probably matters less than the brand or the fact that they are seen smoking by their friends (if it is in fact cool to smoke given all the evidence available these days). There is also a move to cheaper brand cigarettes, which may also be produced from the same makers and may be manufactured from inferior quality ingredients.

    •The link between consumption of soft drinks and beers was unclear. They are certainly not substitutes.

    •I don’t agree with liking smokers impacts on health care costs and on society with those that lay on the couch all day. The significance of the impact on the smoking population on the health care system can be quantified, whereas I doubt the same can be made with couch ‘potatoes’.

    •I completely disagree that the health care costs of someone dying from lung cancer would be equal or less than those costs of someone who dies from living longer. There are a few key points here and that is the health of the average person and their costs on the health system and the health of the average smoker and the costs they impose on the health system, if and when they are affected by a poorer state of health through lung disease, or other health impact. It is also important to note that smokers are generally less healthy as smoking reduces their ability to both partake and perform effectively in cardiovascular activities. As a result, smokers are less likely to be as healthy and more likely therefore to be unhealthy in their life and thus require more health care than the average person that does not smoke. One final point regarding health costs is do with age. The average age of a smoker compared with the average age of a non-smoker is important in determining the answer to this issue. One would need to determine the average age of a smoker and the average age of a non-smoker and the average cost that each imposes on the health care system. Without this assessment, a conclusion cannot be reached. It would be my guess that the average smoker would impose high costs on the health system than a non-smoker.
    •Regarding smokers’ cost on the health care system, it would also be interesting to determine whether the average smoker is also likely to consume more alcohol than a non-smoker. If this was determined, then smokers may impose even greater health costs on society.
    •Finally, your discussion of smokers has excluded a very important factor – the cost of externalities on society as a result of smoking. Therefore, in addition to impacting on the health system due to their consumption of cigarettes, they are also impacting negatively on the environment of all nearby non-smokers. The term given to those that incur the negative externality directly, is ‘passive smokers’. And it is likely that the indirect costs of smoking are significant.
    •This discussion also ignores the environmental impacts of smoking.

    CB

    ReplyDelete
  3. Hi Cam,

    My first read of your blog. Enjoyed the discussion. Some comments:

    • In regards to your statement about petrol having no substitutes, gas is a substitute.
    • With regards to cereals, not only are there a large range of cereals available, more importantly to your point, is that there are numerous direct substitute products, that is products the same as corn flakes, which compete on price.
    • Is Nicorette and the like considered alternative products to cigarettes? Also, part of the issue with taxes on cigarettes is that it is a good with highly inelastic demand which is partly driven by an addition for nicotine. Thus the nature of elasticity differs between products.
    • With regards to your comments regarding younger and older smokers, I think the point I made above is key to understanding your point. Movements in consumption patterns of younger smokers are possible or more likely due to the fact that they are less addicted. Part of the reason they smoke is probably due to peer pressure. Whether they smoke a cigarette that is high in nicotine or low probably matters less than the brand or the fact that they are seen smoking by their friends (if it is in fact cool to smoke given all the evidence available these days). There is also a move to cheaper brand cigarettes, which may also be produced from the same makers and may be manufactured from inferior quality ingredients.
    • The link between consumption of soft drinks and beers was unclear. They are certainly not substitutes.
    • I don’t agree with liking smokers impacts on health care costs and on society with those that lay on the couch all day. The significance of the impact on the smoking population on the health care system can be quantified, whereas I doubt the same can be made with couch ‘potatoes’.
    • I completely disagree that the health care costs of someone dying from lung cancer would be equal or less than those costs of someone who dies from living longer. There are a few key points here and that is the health of the average person and their costs on the health system and the health of the average smoker and the costs they impose on the health system, if and when they are affected by a poorer state of health through lung disease, or other health impact. It is also important to note that smokers are generally less healthy as smoking reduces their ability to both partake and perform effectively in cardiovascular activities. As a result, smokers are less likely to be as healthy and more likely therefore to be unhealthy in their life and thus require more health care than the average person that does not smoke. One final point regarding health costs is do with age. The average age of a smoker compared with the average age of a non-smoker is important in determining the answer to this issue. One would need to determine the average age of a smoker and the average age of a non-smoker and the average cost that each imposes on the health care system. Without this assessment, a conclusion cannot be reached. It would be my guess that the average smoker would impose high costs on the health system than a non-smoker.
    • Regarding smokers’ cost on the health care system, it would also be interesting to determine whether the average smoker is also likely to consume more alcohol than a non-smoker. If this was determined, then smokers may impose even greater health costs on society.
    • Finally, your discussion of smokers has excluded a very important factor – the cost of externalities on society as a result of smoking. Therefore, in addition to impacting on the health system due to their consumption of cigarettes, they are also impacting negatively on the environment of all nearby non-smokers. The term given to those that incur the negative externality directly, is ‘passive smokers’. And it is likely that the indirect costs of smoking are significant.
    • This discussion also ignores the environmental impacts of smoking.

    Regards,
    CB

    ReplyDelete
  4. It would be interesting to compare alcohol with smoking. I wonder who would win that one.

    ReplyDelete
  5. "Finally, your discussion of smokers has excluded a very important factor – the cost of externalities on society as a result of smoking. Therefore, in addition to impacting on the health system due to their consumption of cigarettes, they are also impacting negatively on the environment of all nearby non-smokers. The term given to those that incur the negative externality directly, is ‘passive smokers’. And it is likely that the indirect costs of smoking are significant."

    This is the biggest issue here. I think you picked the wrong sin tax to use as an example.

    ReplyDelete
  6. cam - i think you have neglected the life long health costs of a smoker on the system -eg more drs visits for complications from colds/flu etc etc whether they die at 65 or 75 or 85.- compared to a non smoker who may die at an older age

    ReplyDelete
  7. G'day Cam and all readers,

    re smoking and health care costs: it can be demonstrated that if all smokers quit there would be immediate savings for total health care costs, but in the longer term, total health care costs would rise (as people will live longer and incur more health care costs):

    Seet his reference: http://www.nejm.org/doi/pdf/10.1056/NEJM199710093371506

    ReplyDelete