Smoking and Cigarette Taxes in the Slovak Republic

According to news reports by TMCnet and the Slovak Spectator, the Slovak cabinet, in August 2007, proposed a bill to raise the excise taxes on cigarettes beginning in 2008. If the excise tax proposal is approved by the parliament, the minimum excise tax per pack of cigarettes will increase from SK34 to SK42, a 23.5 percent increase. The price of a pack of the most popular brands of cigarettes will increase from SK50 to SK60. In 2006 there were 4.3 billion (215 million packs) of cigarettes sold in the Slovak Republic. According to the Finance Ministry, if the proposal is approved, it is expected to generate additional tax revenue in the amount of SK1.2 billion. In 2006 the Slovak government collected about SK11.5 billion in revenue from the excise tax on tobacco.

According to data available from the World Health Organization available at GLOBALLink, a website maintained by the International Union Against Cancer, 41.1 percent of Slovak males and 14.7 percent of Slovak females ages 15 and older were daily smokers in 1998. For Slovak youths between the ages of 15 and 16, 35 percent of males and 26 percent of females were daily smokers in 1999.

In an April 2005 article entitled “ Life in EU without tobacco?” The Slovak Spectator, reports the results of a poll conducted by the Slovak Statistical Office in December 2004. The poll results indicate that Slovaks accept tobacco and alcohol as legal drugs. The poll results also indicate that as many as 28 percent of Bratislava’s youth are daily smokers and that that smoking is most prevalent among blue collar workers and the unemployed. Smoking is least prevalent among women and senior citizens.

A Gallop Organization world poll entitled “Smoking Rates Around The World“ that was conducted in August 2007 found that 31 percent of Slovaks aged 18 and older indicated that they smoked the day before the interview. The incidence of smoking was 28 percent in all European Union countries combined, 24 percent in the United States, 33 percent in the Ukraine, and 37 percent in Russia.

In an article entitled “Why do Europeans Smoke More Than Americans?” The Economist summarizes the research on this question by Harvard University economists David Cutler and Edward Glaeser. According to The Economist article, the two economists concluded that Americans smoke less because they are more likely to believe that smoking is harmful to their health than are Europeans. The authors conclude that between 20 and 40 percent of the differences in smoking rates between Americans and Europeans can be attributable to these belief differences.

Proponents of higher excise taxes on cigarettes argue that, in addition to generating revenue for the government, the tax serves to reduce the incidence of tobacco use, especially among younger people. They argue that the higher tax increases the price of cigarettes. Because of the higher cigarette prices many young people who already smoke will stop smoking and those who are not smoking will not begin to smoke.

Opponents of the higher excise taxes argue that higher cigarette taxes lead to increased black market activity in cigarettes. They also argue that the higher taxes will unfairly burden lower income groups.

Thinking About It As An Economist

1. Use demand and supply analysis to explain how the increased tax on cigarettes would affect the market for cigarettes in the Slovak Republic. Illustrate your answer graphically.


2. If the government wants to generate substantial revenue from the cigarette tax, would it be best if the demand for cigarettes were highly elastic or highly inelastic given supply elasticity? Explain and illustrate your answer graphically.
   
   
3. If the goal of the cigarette tax were to reduce smoking among the Slovak population, would it be best if the demand for cigarettes were highly elastic or inelastic? Explain and illustrate your answer graphically?



4. Would an increased tax on alcohol affect the demand for cigarettes? Explain.



5. Most studies of the demand for tobacco products in middle income countries have found the overall price elasticity of demand to range from -.5 to –1 (Chaloupa, et al, 2003). Assume that the demand for cigarettes in Slovakia is -.75. If the average price of a pack of cigarettes increases from SK50 to SK60, by how much would the quantity demanded of cigarettes change as a result of the tax?



6. The price elasticity of demand for tobacco products in high income countries has been estimated to range from -.25 to -.5 (Chaloupa, et al, 2003). Recall from question 5 that the estimated demand elasticity for middle income countries is between -.5 and –1. Why do you think the demand for cigarettes is less elastic in high-income countries than in middle-income countries?



7. Do you think that the elasticity of demand for cigarettes for young Slovaks would be higher or lower than the overall elasticity of demand for cigarettes in Slovakia? Explain your answer.



8. Is the proposed cigarette tax progressive, regressive or proportional? Explain.



9. Does cigarette smoking entail any external (spillover) costs? If yes, identify them.



10. If cigarette smoking imposes external (spillover) costs, will the free market result in overproduction, underproduction, or optimal production of cigarettes? Illustrate your answer graphically.



11. Why do you think that a larger percentage of Americans than Europeans believe that smoking is harmful to their health?



12. In addition to raising the cigarette tax, what other methods could be used to reduce cigarette smoking among the Slovak population?
    
    Learning More About It
    
    The review article entitled “ Alcohol and Cigarette Taxes” by Grossman, et al, (1993), which is cited in the reference list below, provides a detailed review of the economic literature dealing with most aspects of tobacco and alcohol use and taxation. The article is written in non-technical language and contains a detailed review of the literature on the issues of alcohol and tobacco use and taxation. The article also contains a very detailed list of references. The article was published in 1993. Nevertheless, since it is relatively easy to read and addresses most of the major economic aspects of alcohol and tobacco use and taxation, it is an excellent source for students who wish to become more informed about the economic aspects of alcohol and cigarette use and taxation.
    
    References
    
    Cabinet Agrees To Raise Tobacco Tax Next Year. (2007, August 22). The Slovak Spectator. Retrieved September 24, 2007 from http://www.slovakspectator.sk/.
    
    Chaloupka, Frank J., Hu, Teh-wei , Warner, Kenneth E., Jacobs, Rowena & Yurekli Ayda. (2003). The Taxation Of Tobacco Products. (chapter 10). The World Bank. Retrieved September 27, 2007 from http://www1.worldbank.org/tobacco.
    
    Grossman, Michael, Sindelar, Jody, Mullahy, John, & Anderson, Richard. (1993). Policy Watch: Alcohol And Cigarette Taxes. The Journal of Economic Perspectives, 45(4), 211-222.
    
    Jurinová, Martina. (2005, April 11). Life In The EU Without Tobacco? The Slovak Spectator. Retrieved August 29, 2007 from the http://www.slovakspectator.sk/.
    
    Slovak Cigarette Prices To Grow As Of 2008. (2007, August 27). TMCnet NEWS. Retrieved September 24, 2007 from http://www.tmcnet.com/.
    
    Smoking Rates Around The World. (2007, August 17). The Gallop Organization. Retrieved September 26, 2007 from http://www.gallupworldpoll.com/.
    
    Tobacco Control Country Profiles 2003: Slovakia. (2003). Global Link.
    Retrieved September 27, 2007 from http://globalink.org/.
    
    Why Do Europeans Smoke More Than Americans? (2007, April 27). The Economist Print Edition. Retrieved October 10, 2007 from http://economist.com/finance/displaystory.cfm?story_id=E1_GRGTRQR.