Earlier this semester I set the following assignment question to my Honours/Masters students:
Treasurer Chris Bowen will today announce staged 12.5 per cent tax increases, starting on December 1, aimed both at deterring young people from taking up the habit and helping to repair the Budget.” (Herald Sun August 1, 2013)
Write a submission to a Senate enquiry into a proposed increase in tobacco excise.
Your submission should deal with some or all of the following issues:
The costs tobacco consumption impose.
The benefits tobacco consumption generate.
The interaction of taxation and tobacco consumption.
Any other issues that would be of public interest.
The Rudd-Gillard government more or less implemented the recommendations of the Henry Review relating to tobacco excise. Anyway the answers I got back all related to the medical costs of tobacco consumption and externalities and the like. But it seems to be there is an additional issue that gets overlooked. Tobacco prices feed into the CPI calculation which in turn is used to index tobacco excise. At face value that is sensible, what what happens if tobacco excise was indexed to a variable like wages that grows at a faster rate than CPI?
So I did some digging around and produced a short paper that looks at the issues. It seems to be that massively ramping up the tobacco excise won’t raise as much net revenue as the then Rudd government thought and the current Abbott government thinks. In fact it appears to be a violation of Adam Smith’s tax maxim:
Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible, over and above what it brings into the public treasury of the state.
Increasing the tobacco excise leads to an increase in the CPI – to the extent that a lot of government spending is itself linked to an increase in CPI that means that government spending is disproportionately increased if the tobacco excise is substantially increased.