Why Is Tax Hike An Ineffective Way to Discourage Smoking?

On 19 February 2018, Singapore’s Finance Minister Heng Swee Keat announced a 10 per cent rise in excise duty for all tobacco products, effective on the same day. According to the Straits Times report, the tax hike is “the latest in a slew of initiatives to keep Singapore smoke-free.”

As a non-smoker myself, I applaud the government’s relentless efforts in discouraging people from smoking. Smoking will not only cause harm to the health of the smokers themselves, but also to people around them and pollute the environment. However, is tax hike an effective way to discourage smoking? My answer is negative. Let me explain why from the economic perspective.

Price Elasticity of Demand for Tobacco Products

In economics tuition, one of the basic concepts that students will learn from their economics tutor is price elasticity of demand and price elasticity of supply. Demand for tobacco products is price inelastic, meaning the change in price due to the tax hike by the government will lead to a smaller percentage change in demand. Students who have attended the economics tuition classes conducted by Mr. Edmund Quek, a highly sought-after economics tutor should be familiar with the economic concept of price elasticity. As a widely used example, why are tobacco products price inelastic?

Tobacco Products are addictive in nature. Despite the price surge as a result of tax hike, consumers may not be able to reduce the consumption of tobacco products to the same extent, if any at all. Singapore is known for taxing heavily on tobacco products. A typical packet of 20 cigarettes costs more than S$12 in Singapore while its price in Malaysia is about half. However, the high price fails to deter smokers in Singapore. According to Health Promotion Board, the percentage of smokers dropped from 1992 to 2004, but hovered between 12 and 14 per cent thereafter. I doubt a further increase in price will do much difference. In consultation with your economics tutor, give a few other examples of consumer products with a price inelastic demand.

Minimum Age for Smoking

Following the tax hike, the minimum age for smoking will be raised from the current 18 years old to 19 years old from 1 January 2019. It will be further raised to 20 years old on 1 January 2020 and ultimately to 21 years old on 1 January 2021. The increase in minimum age will effectively reduce the smoking population and hopefully bring down the percentage of smokers in Singapore significantly in the near future.

The increase in minimum age for smoking has its economic implications. Sign up for an economics tuition class by a high-quality economics tutor today to find out more. There are quite a number of good economics tutors who are able to use economic concepts to explain real world economic events such as a tax hike for tobacco products.

Boost Government Revenue

Similar to the two per cent increase in Goods and Services Tax, I believe part of the reason for the tax hike for tobacco products is to boost the government revenue. Based on data published on www.singaporebudget.gov.sg, Singapore’s tax revenue from tobacco excise duty in 2014 is S$1.13 billion, an increase of 9.4 per cent from the previous year. The jump in tobacco tax revenue can be attributed mainly to the 10 per cent tax hike in 2014. It is interesting to note that tax revenue from tobacco excise duty is more than that from petroleum products and liquors collectively.

By applying the economic concepts you have learned in economics tuition from economic tutor, explain why the Singapore government prefers a high tobacco tax to a tobacco ban. With guidance from your economics tutor, you should be able to understand why the benefits outweigh the costs to allow smoking in Singapore at a high tobacco tax.

In closing, the tax hike for all tobacco products may not be an effective way to discourage people from smoking. However, it will increase the government’s tax revenue to a great extent, which can be channeled to various government initiatives to benefit all Singaporeans.

Linda Geng

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