[Intl-tobacco] Death and taxes - huge hole discovered in Czech smoking study

[Robert Weissman]

For those who haven't earlier seen this post, Clive Bates of ASH UK offers
a very insightful analysis of the Philip Morris cost-benefit analysis of
smoking-related death and illness in the Czech Republic. This is important
not so much for that particular case as to address the general claims made
by tobacco apologists against arguments that smoking imposes huge dollar
costs on society.

-- 
Robert Weissman	<rob@essential.org>
Essential Information
P.O. Box 19405, Washington, DC 20036, USA
Tel: 1-202-387-8030
Fax: 1-202-234-5176
www.essential.org

Dear friends

I agree with others that we shouldn't go too deeply into smoking
cost-benefit analysis.  But one worrying aspect of the publicity over the
Philip Morris study is that it does encourage the argument: "well they do
have a point, dead smokers do save money" to be expressed, however
repulsive.  For smokers and pro-tobacco governments this can be a
self-serving argument and rationalisation.

Actually the argument is blown apart by the PM study itself.  In fact, the
study shows the costs of smoking are 13 TIMES greater than the 'benefits'
from early death.  The study only shows a net headline benefit to smoking by
cheating through including tobacco taxes.  Here's how it works...

In the study, the total public sector finance costs (in million CZK)
attributed to smoking are:

11,422 - Health care costs
1,367   - Lost income due to higher mortality
1,667   - Absence from work
1,142   - ETS related health care costs
49        - Fires
=====
15,647

The so-called 'benefits' are:

968   - Health care savings due to early mortality
196   - Pensions and social cost due to early mortality
28     -  Housing costs for the elderly that die early
=====
1,192

Thus the cost burden of smoking is some 13 TIMES greater than the savings -
in this tobacco industry study!!!!  As you can see the health costs hugely
outweigh the 'benefits' of early death.  But that is not how the story has
run....  from the coverage and commentary from our side, you would think we
were countering the argument that smoking had a net benefit, but that it was
immoral to look at it this way.

So how does PM and AD Little manage to claim a headline net benefit of 5,815
mil CZK from smoking?

Simple! The difference is made up of taxes:

15,648  - Excise taxes (tobacco duty)
3,521   - VAT (sales tax)
747      - Corporate taxes
354      - Customs duty
=====
20,270

Which gives total 'benefit' of... 21,462 or the a net benefit of 5,815
greater than the cost of 15,647.

But who said they could include taxes in the benefit side?

The costs and 'benefits' or smoking itself are real economic impacts
(although highly disputable).  Taxes are quite different.  They represent a
transfer from one part of the economy to another, and the spending that
generates them goes somewhere else if not spent on tobacco.  If the Czech
government didn't have tobacco in its economy, consumers would spend
differently and the government would simply raise its tax from another tax
base - income, profits, inheritance, capital gains, alcohol, fuel, waste,
carbon - whatever.  There are many available tax bases.

The right way to do studies like this is to consider two scenarios and then
compare them and look at the differences from the perspective of different
observers or participants - eg. public sector finances, society as a whole,
employers, individuals.  The two scenarios could be:

1. Czech economy with tobacco

2. Czech economy without tobacco

The PM study looks only at the impact on public finances.  But what would
happen to tax income to Czech Republic in scenario 2?  It would not all just
be lost to the Czech govt.  There would simply be a rebalancing of the tax
bases on which the national budget was raised.  So in scenario 2 - the Czech
govt may (for instance) have slightly higher taxes on goods (eg. a half
percent increase in VAT) a higher fuel duty, a carbon tax, and increased
national insurance contributions - there would also be higher consumer
spending on non-tobacco goods and services which would increase tax income
from other non-tobacco sources.

However, it would make GENUINE savings on health care,  productivity, fires
etc that would be 13 times greater than the so-called benefits of early
death (which from public finance point of view are real savings).

Further, the study looks at public finances - not society as a whole.  This
is not a proper societal cost benefit analysis in which private and employer
costs would be much greater.  On top of that you could also attempt to give
monetary values to costs not usually expressed in money - like lost life
years, grief of relatives, pain and suffering prior to death.  But that
would send the figures into orbit!

Conclusion
-----------
So the real lesson of PM's study is that the burden of smoking on the public
finances is 13 times greater than the so-called benefit arising from people
being killed off early.  Counting taxes in the benefits of smoking is the
only way a net benefit can be shown for smoking, but this is cheating
because tax revenue would easily be raised on something other than tobacco
if there was no tobacco in Czech Republic.


The study is at Gene Borio's site:
http://www.tobacco.org/Documents/001128pmlittleczech.html


Two minor qualifications for the purists (and not necessary for the
conclusion above):

First, the real difference between scenario 1 and 2 in tax terms arises from
any impact from raising taxes on different BASES.  Tobacco is good to tax
because it does nothing for the economy, whereas a rise in, say, income
taxes may have an economic cost in unemployment - so there could be  a
negative effect from rebalancing the tax base.  But these are 2nd order
effects compared to simply counting the tobacco tax as a net benefit.

Second, if consumers in scenario two do something different that creates
other costs and benefits then these would have to be considered.  But
smoking has such a high cost burden, doing almost anything else is likely to
provide huge benefits.


Best regards


Clive Bates
Action on Smoking and Health
102 Clifton Street
London EC2A 4HW
Tel: +44 20 7739 5902
Fax: +44 20 7613 0531