The Government should increase the tax on tobacco

The following article appeared on the opinion pages of The Jakarta Post on 02 July 2008. I reproduce the original for your reading pleasure.

Indonesia is addicted to smoking. Cigarette advertisements dot the skyline and clog the airwaves. If you go to a concert or a sporting event, it is likely that the cost of your ticket will be subsidised by a tobacco company. Over 63 per cent of Indonesian men over the age of 15 are smokers. Almost 5 per cent of the world’s smokers come from Indonesia even though Indonesia’s population makes up only 3.5 per cent of the global total. In 2005, it was estimated that Indonesians consumed nearly 200 billion cigarettes. In short, the tobacco industry is pervasive and tobacco consumption has reached epidemic proportions.

Despite clear evidence that high levels of smoking are a burden on a society’s health and well being, the Indonesian Government has failed to take any meaningful action to address the smoking epidemic and its associated problems. Indonesia is the only country in East Asia not to have ratified the World Health Organisation’s Framework Convention on Tobacco Control. Tobacco taxes in Indonesia are the lowest in South East Asia while there are few limits on the sale, consumption or advertising of tobacco products. Other countries in the region, having realised the malign influence of tobacco, are actively discouraging its consumption. Indonesia, the tobacco control “rogue state”, is being left behind.

The key reason for Indonesian government non-interventionism is because policy thinking in this country is captive to the idea that the tobacco industry is of greater benefit to the economy than tobacco control measures. The Government, it seems, is of the view that the increasing restrictions on the tobacco industry would harm the economy by reducing the valuable flow of taxation revenue from tobacco consumption.

The Government’s position is in stark contrast to mainstream and credible economic opinion on the issue of tobacco control. Most serious economic analyses of tobacco conclude that well targeted tobacco control measures are, in fact, good for an economy and government revenue.

A good way to look at the issue of smoking in an economic manner is to consider whether all of the costs of tobacco consumption are incorporated in the price paid by the smoker for tobacco related products.

When a smoker consumes a packet of cigarettes, for example, he damages the health of the people around him as they inhale his second hand smoke. The same smoker also increases the chance of damaging his own health and suffering an untimely death. Consequently, his contribution to society and the economy is reduced. When a poor smoker spends a disproportionate amount of his income on cigarettes he reduces his family’s ability to pay for education and food. Who bears the burden of all these additional costs? Although the smoker bears some of them as a result of his decision to smoke, these examples highlight the fact that there are significant costs imposed on others without their consent as a result of his decision.

Estimates from the World Health Organisation and others suggest that these negative impacts of tobacco consumption far outweigh the positive benefits of the tobacco industry. There is a significant cost to society resulting from increased healthcare and economic costs resulting from morbidity and mortality as well as the forgone opportunities resulting from consumption expenditure on tobacco.

The low price that Indonesians currently pay for cigarettes fails to capture the cost of all of these negative social impacts that are caused by the consumption of tobacco even with 22 per cent of the price flowing to government coffers. In economic terms, such a situation is called a “negative externality”: the “external” or social costs of consumption are not accounted for in the price of a good.

If there are negative externalities resulting from consumption or production of a good, it is now widely accepted that government intervention in the market may be an appropriate response. Happily, in the case of tobacco, there is an extremely powerful public policy intervention avalaible that makes economic sense, should be effective at reducing consumption and can be used to offset the social costs of that consumption. The intervention is simply to raise tobacco taxes.

Estimates, again from the World Health Organisation and others, suggest that if tobacco taxes are raised by ten per cent then consumption of tobacco falls by around eight per cent. This means that revenue from tobacco taxation is actually increased even though consumption falls. The ill effects from smoking are reduced from this reduction in consumption and the government has additional money in the bank to combat the negative social impacts resulting from the activities of the remaining smokers.

To evaluate whether tax increase is an appropriate policy two further issues should be considered. The first of these is whether the tax increase is “regressive” or, in other words, has a greater impact on the poor than on the rest of society. There is no doubt that the poor are less able to absorb the costs of tobacco tax increases. However, because of this, it is the poor that are estimated to reduce their consumption more than the middle class in response to a tax increase. In fact, many estimates suggest that the poor, unlike the middle class, will reduce their consumption by a larger factor than the tax increase. If this is the case, a lower proportion of their income is spent on tobacco than before the tax was imposed. Therefore, the effect of the tax increase is likely to be “progressive”. The wealthier strata of society will bear a greater burden of the tax increase.

The tax increase could, therefore, offset some of the social impacts of tobacco used in poor communities and frees consumption expenditure in those communities for more positive purposes. Meanwhile, the government is collecting additional revenue that can be used to deliver social welfare programmes to these same communities.

The government may be concerned about the negative economic consequences of a contracting tobacco industry. Again, economic analysis suggests that the overall impact of a tax increase on industry would be far outweighed by the benefits of reduced consumption. Studies suggest that, although some tobacco farmers would be effected by increased taxes, it would be no more pronounced than if a price/demand fluctuation occurred for any other agricultural commodity. Moreover, with rising food prices, other agricultural products become more attractive alternative crops for farmers currently farming tobacco.

On the manufacturing side, although taxes would likely see a fall in cigarette production, this is unlikely to lead to significant job losses. Meanwhile, the long term economic benfits of more productive healthy workers would likely increase opportunities, investment and growth. This would help offset the costs of any tobacco manufacturing downturn.

The message is simple. Increasing tobacco taxes should increase revenue, reduce tobacco consumption, diminish negative social impacts of tobacco consumption and improve overall economic outcomes. It would also go some way to reducing Indonesia’s status as the international pariah on tobacco control with some of the lowest tobacco taxes in the world. It would be an even more effective policy approach if it were implemented alongside other anti-smoking policies such as advertising restrictions, smoke free areas and education campaigns.

The writer is an advocacy consultant to the Indonesian Consumers’ Organisation (YLKI).