Excise Tax Rates On Tobacco And Tobacco Products Increase

Excise Tax Rates On Tobacco And Tobacco Products Increase In March and

Perform a web-search to determine the amount of excise tax charged (as at 1 January 2018) on a standard 20 packet of cigarettes. If the standard packet is sold for a price of $30, how much is the before tax price? Illustrate using the demand and supply model, the effects of a tax imposed on sellers of tobacco products. Explain in detail who pays the tax (buyers and/or sellers) and discuss the role the price elasticity of demand plays in determining the impact on prices and quantity of tobacco products sold. Be explicit about any assumptions made in developing predictions.

Paper For Above instruction

The taxation of tobacco products, particularly cigarettes, is a common policy tool used by governments worldwide to reduce tobacco consumption and improve public health outcomes. As of January 1, 2018, the excise tax charged on a standard 20-pack of cigarettes in Australia was approximately AUD 10.55, according to the Australian Taxation Office (ATO, 2018). This excise tax is levied per 1,000 cigarettes, which typically equates to AUD 10.55 per 20-pack. When considering the retail sale price of AUD 30 for a standard pack, it is necessary to determine the pre-tax price. Subtracting the excise tax from the retail price yields the before-tax price: AUD 30 - AUD 10.55 = AUD 19.45. Therefore, the excise tax constitutes roughly 35.2% of the retail price, highlighting its significant impact on the final cost of cigarettes.

Using a demand and supply model, the impact of excise tax introduction can be analyzed. Prior to taxation, the market for cigarettes is in equilibrium, where the demand curve intersects the supply curve. When taxes are imposed on sellers—here, cigarette producers or importers—the supply curve shifts upwards by the amount of the tax. This shift causes a new equilibrium with a higher market price for consumers and a decreased quantity sold, illustrating the typical effect of taxes on markets.

The question of who bears the tax burden—buyers or sellers—is explained by the elasticity of demand. If demand is inelastic, meaning consumers are less sensitive to price changes, they tend to bear a larger share of the tax burden because their consumption remains relatively stable despite price increases. Conversely, if demand is elastic, consumers reduce their quantity demanded significantly when prices rise, and sellers bear a larger share of the tax burden, often absorbing some of the tax costs to avoid losing sales.

In the context of tobacco, demand is generally considered inelastic because of its addictive nature. This inelasticity implies that a substantial portion of the excise tax is shifted to consumers in the form of higher retail prices, leading to a reduction in quantity demanded but not proportionally so. Thus, while the quantity sold decreases, the increase in price largely benefits the government in revenue collection while contributing to public health objectives by reducing overall tobacco consumption.

Assumptions in this analysis include that the market is competitive and that the tax is fully passed on to consumers in the form of higher prices. Additionally, it is assumed that demand remains relatively unchanged by external factors during the period considered and that the supply curve is upward sloping, reflecting increasing marginal costs.

Overall, government excise taxes on tobacco serve both as a revenue source and a demand-side policy tool to curb consumption by exploiting the inelastic nature of tobacco demand, with the burden primarily falling on consumers due to the inelastic demand elasticity.

References

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