Economic incentives as preventive medicine
3
British Journal of Addiction (1992) 87, 1629-1630 EDITORIAL Economic incentives as preventive medicine The UK health and medical establishment has been preoccupied this year with engaging government support for the European Community proposed directive to ban tobacco advertising throughout the community. Cigarette taxation is another arm of policy which has particular potential for affecting the level of tobacco consumption. Taxation makes up the major part of the price of cigarettes, but has sometimes been eroded during rapid inflation. There have been considerable variations in real price over the last two decades and these have been mirrored by changes in smoking in the opposite direction.' These short term changes are often far from marginal and indicate the power of pricing policy to determine smoking levels. For example between 1977 and 1979, a time of rapid inflation, cigarette prices fell by 13% and smoking rose by 10%. This was repeated to a lesser extent in the late eighties when tax failed to keep up with inflation, cigarette consumption rose and the smoking preva- lence of 15 year olds increased from 20% to 25%. Conversely from 1980 to 1986 successive chancel- lors increased the real value of cigarette tax, the real price rose 40%, cigarette consumption fell by a quarter and one in six cigarette smokers gave up smoking altogether. The implications for health are clear.^ Studies of the response to cigarette price changes, suggest that for every 1% price increase (decrease), cigarette consumption falls (rises) by about half a percentage point, taking into account changes in other relevant influences such as income, advertis- ing, health education and household composition. Some studies suggest this response is stronger in times of rapid rise in cigarette prices.' Not all groups will respond in the same way. There is evidence that lower income groups'* and young people^ have a higher response, suggesting that cigarette price rises are highly effective at reducing smoking in these key groups. Conversely these are also likely to be the groups at particular risk of increasing smoking when prices fall, as was evident from 1965 to 1980 when the 40% fall in cigarette price appeared to counteract the effects of health education for semi and unskilled manual workers. Substantial and persistent increases in the real value of cigarette prices will be needed in the next decade if the health of the nation smoking targets and the target reductions in cancer, heart disease and stroke are to be achieved. The European Community's excise harmoniza- tion agreement setting the minimum total tax on cigarettes at 70% of the retail price, will soon take effect. Theoretically this leaves the UK free to increase cigarette taxes as it wishes subject to a maximum proportion of the tax (55%) to be raised as a 'specific' tax per cigarette whereas the ad valorem element may be up to 95% of the tax. The agreement does not substantially reduce the wide range of cigarette tax levels in the community, and there is concern that if cross border buying is substantial, average cigarette prices will effectively fall. There will be official limits to the importation of pretaxed cigarettes for personal use (normally 800 per adult) but there will be little in the way or border checks. In the interests of public health and harmonization, the minimum 'specific' tax rate needs to be raised and expressed in money terms rather than ad valorem as at present as a high percentage of a low price still yields a low tax as in Spain and much of southern Europe. Even in countries such as Denmark and UK where cigarettes are relatively expensive, the cost of smoking each individual cigarette is cheap compared with similar purchases so that smokers can use cigarettes in high numbers. A small beer for example costs more than five times as much and a chocolate bar over twice the price. Increases in cigarette taxation can be used 1629
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Transcript of Economic incentives as preventive medicine
British Journal of Addiction (1992) 87, 1629-1630
EDITORIAL
Economic incentives as preventive medicine
The UK health and medical establishment has beenpreoccupied this year with engaging governmentsupport for the European Community proposeddirective to ban tobacco advertising throughout thecommunity. Cigarette taxation is another arm ofpolicy which has particular potential for affectingthe level of tobacco consumption. Taxation makesup the major part of the price of cigarettes, but hassometimes been eroded during rapid inflation.There have been considerable variations in realprice over the last two decades and these have beenmirrored by changes in smoking in the oppositedirection.' These short term changes are often farfrom marginal and indicate the power of pricingpolicy to determine smoking levels. For examplebetween 1977 and 1979, a time of rapid inflation,cigarette prices fell by 13% and smoking rose by10%. This was repeated to a lesser extent in the lateeighties when tax failed to keep up with inflation,cigarette consumption rose and the smoking preva-lence of 15 year olds increased from 20% to 25%.Conversely from 1980 to 1986 successive chancel-lors increased the real value of cigarette tax, the realprice rose 40%, cigarette consumption fell by aquarter and one in six cigarette smokers gave upsmoking altogether. The implications for health areclear.^
Studies of the response to cigarette price changes,suggest that for every 1% price increase (decrease),cigarette consumption falls (rises) by about half apercentage point, taking into account changes inother relevant influences such as income, advertis-ing, health education and household composition.Some studies suggest this response is stronger intimes of rapid rise in cigarette prices.' Not allgroups will respond in the same way. There isevidence that lower income groups'* and youngpeople^ have a higher response, suggesting thatcigarette price rises are highly effective at reducing
smoking in these key groups. Conversely these arealso likely to be the groups at particular risk ofincreasing smoking when prices fall, as was evidentfrom 1965 to 1980 when the 40% fall in cigaretteprice appeared to counteract the effects of healtheducation for semi and unskilled manual workers.
Substantial and persistent increases in the realvalue of cigarette prices will be needed in the nextdecade if the health of the nation smoking targetsand the target reductions in cancer, heart diseaseand stroke are to be achieved.
The European Community's excise harmoniza-tion agreement setting the minimum total tax oncigarettes at 70% of the retail price, will soon takeeffect. Theoretically this leaves the UK free toincrease cigarette taxes as it wishes subject to amaximum proportion of the tax (55%) to be raisedas a 'specific' tax per cigarette whereas the advalorem element may be up to 95% of the tax. Theagreement does not substantially reduce the widerange of cigarette tax levels in the community, andthere is concern that if cross border buying issubstantial, average cigarette prices will effectivelyfall. There will be official limits to the importationof pretaxed cigarettes for personal use (normally800 per adult) but there will be little in the way orborder checks. In the interests of public health andharmonization, the minimum 'specific' tax rateneeds to be raised and expressed in money termsrather than ad valorem as at present as a highpercentage of a low price still yields a low tax as inSpain and much of southern Europe. Even incountries such as Denmark and UK where cigarettesare relatively expensive, the cost of smoking eachindividual cigarette is cheap compared with similarpurchases so that smokers can use cigarettes in highnumbers. A small beer for example costs more thanfive times as much and a chocolate bar over twicethe price. Increases in cigarette taxation can be used
1629
1630 Editorial
as very effective preventive medicine and, when
eroded, there is a high cost in terms of public health.
JOY TOWNSEND
MRC Epidemiology & Medical Care Unit,
Wolfson Institute of Preventive Medicine,
The Medical College of St. Bartholomew's Hospital,
Charterhouse Square,
London ECIM 6BQ, UK
References
1. ROYAL COLLEGE OF PHYSICIANS (1992) Smoking and
the Young, p. 66 (London, RCP).
OFFICE OF POPULATION CENSUSES AND SURVEYS(1991) Monitor on Cigarette Smoking 1972-1990(London, OPCS).FRY, V. & PASHARDES, P. (1988) Changing patterns ofSmoking: are there economic causes? (London, Insti-tute of Fiscal Studies).TOWNSEND,]. (1987) Cigarette tax economic welfareand social class patterns o{imoking. Applied Econom-ics, 19, pp. 335-365.LEwrrr, E. M., COATES, D . & GROSSMAN, M . (1981)The effects of government regulation on teenagesmoking. Journal of Law and Economics, 14, pp.545-569.
