Antonis Ntrongoulis

Year 12 IB Economics
Mr. Foley Practice IA

Tobacco tax expected to raise more than $5bn

Smokers face excise increase of 12.5% over the next four years to make up
federal budget shortfall
A substantial hike in tobacco excise is expected to deliver more than $5bn to the
federal budget between now and 2018, the Rudd government has confirmed.
The tobacco excise will be increased by 12.5% over the next four years. The
government has been attempting to frame the revenue grab as a health measure,
pointing to preventive health issues it is also undertaking.
After telegraphing its intentions for several days, the government has now
confirmed the increases will commence on 1 December 2015.
Further increases will occur on 1 September 2016, 1 September 2017, and 1
September 2018. The tax hike is in addition to increases that would have
occurred through indexation.
Treasurer Chris Bowen said the increase in excise would bring Australia closer to
the taxation standard recommended by the World Health Organisation.
"This I know, won't be universally popular at all. It's a difficult decision. But it's a
decision which is taken in the best interests of the nation taking account all the
impacts it has, both on the government's budget, and also on the health
outcomes for Australia," he said.
Bowen told reporters in Sydney on Thursday morning the $5.3bn tobacco tax hike
was a "substantial" measure; one of the biggest revenue measures in the
government's economic statement due for release later this week.
Bowen also sent a broad hint that the banks could be another source of revenue
once the economic statement was released. A report in the Australian Financial
Review speculates that the economic statement will contain a deposit insurance
levy as recommended by the Council of Financial Regulators - a measure raising
billions.
The funds raised would underwrite any Australian bank should it need assistance
in the future. Bowen told reporters Labor had no plans to tax the banks, but
remained "in discussions" with banks concerning reform recommendations from
the financial regulators. Bowen said those consultations would continue.
Finance minister Penny Wong said the levy had been raised by the International
Monetary Fund and the Reserve Bank of Australia. But she declined to confirm or
deny whether any decision had been made. She said there was always
speculation during budget processes "and a lot of it is inaccurate."

Antonis Ntrongoulis
Year 12 IB Economics
Mr. Foley Practice IA
Bowen also confirmed on Thursday that the economic statement would outline
the full costs of the regional resettlement agreement with Papua New Guinea.
The government has thus far declined to quantify the costs of that agreement.
The government has faced a substantial task to meet its commitment to return
the budget to surplus in 2018-19. Tax revenues have been weak, and the
government must offset spending associated with policy adjustments made
by Kevin Rudd since he returned to the Labor leadership.
Bowen and the prime minister began to soften the ground for the tobacco tax hike
on Wednesday in separate events in Sydney and Brisbane.
"As the prime minister said today, we need to be continually looking at what we
can do to reduce smoking," Bowen said on Wednesday afternoon.
"There is not a family in Australia that hasn't been touched by cancer caused by
smoking.
"I think the Australian people would agree with us, that we need to consider all
sorts of measures to reduce smoking."
The Labor government has been active throughout its two terms in government to
reduce smoking rates, including pursuing and winning a landmark high court case
that has imposed plain packaging on the tobacco industry.
The Cancer Council has endorsed tax hike. The council's chief executive, Prof
Ian Olver, said price control through excise was by far the most effective public
health measure to bring down smoking rates, particularly among young people
and people on lower incomes.
"Evidence shows that the increase in excise in 2010 has driven down tobacco
consumption by around 11%," Olver said.
There is continuing speculation the government will use the release of the
economic statement - either Friday, or over the coming weekend - as a
springboard for calling the federal election for 7 September.
The Coalition has been critical of the tobacco measure. It says the government
should seek to control spending rather than raise taxes, particularly those
impacting disproportionately on low income earners. "This is just another tax.
Let's not listen to this palaver about health, it's all about revenue," the opposition
leader, Tony Abbott, told reporters in Melbourne on Thursday morning.
Abbott said the opposition would respond to the statement once it was in the
public domain. He said he would not be drawn on specific measures in this
interim period before the statement was released.
"This is a government that can't control its spending. Whenever it gets into
trouble, it hits you, the Australian people with new taxes. If they do this to you
before the election, think how much worse it will be after the election," Abbott
said.

Antonis Ntrongoulis
Year 12 IB Economics
Mr. Foley Practice IA
http://www.theguardian.com/world/2013/jul/31/government_tobacco
_tax_economic-statement
Article: 823 words

The Australian government the past few years have been

trying to weaken the tobacco industry in Australia, this is because
cigarettes are a demerit good, "a good which is considered
unhealthy or damaging in and physically harmful but also mentally
harmful Businessdictionary, 2014. In numerous cases, demerit
goods are subject to additional taxes in order to reduce
consumption; these taxes are known as sin taxes. In 2010 the
Australian government largely taxed the cigarette industry with VAT,
"an indirect tax that is placed on a product whenever value is added
at a stage of production and at final sale" and the tobacco
consumption dropped by around 11%. Thus in 2014, they increased
the VAT by 12.5% over the next four years in hope of further
reduction of smoking.
This VAT affects both the individual producers and the entire
market and this is due to the price elasticity of demand and supply,
which is defined as the responsiveness of the quantity demanded or
supplied to a change in price, and its measured as shown below:

Price elasticity of supply is in most cases inelastic in the

tobacco industry because they are highly addictive and their
demand doesnt vary with economic change. Thus, the incidence of
taxation varies for individual producers but also the entire tobacco
industries.
http://www.economicsonline.co.uk/Competitive_markets/Tax_inciden
ce.html

Positives and negatives in real life:

http://www.economicshelp.org/microessays/as/should-tax-cigarettesincreased/

Antonis Ntrongoulis
Year 12 IB Economics
Mr. Foley Practice IA

Bibliography:
http://www.forbes.com/sites/thestreet/2013/09/06/big-tobaccotakes-its-last-drag-as-economic-change-looms/
http://www.investopedia.com/terms/v/valueaddedtax.asp

http://www.businessdictionary.com/definition/demeritgood.html