For many years, the cigarette has been regarded as a commodity ideal for taxation, since it is not a necessity and is bought by many people. As early as the eighteenth century, Adam Smith proposed in his book Wealth of Nations (1776) that a tobacco tax would permit poor people to "live better… and to send their goods cheaper to market. " Demand for their work would grow higher, and as a result, increasing the earnings of poor individuals and contributing to the whole economy. Centuries later, almost all governments tax tobacco, most of the time hugely, by various different methods.
Their purpose has almost always been to produce revenue, although, in the past few years, taxes have also mirrored a heightened concern for the necessity to lower the damaging effects of smoking. For simplicity, a specific tax will be considered in this paper. This is a tax of a certain fixed amount per unit sold. Because it is included as a fixed amount to the price of cigarettes, it allows the greatest flexibility and allows governments to increase the tax with less risk that the industry will respond with actions that keep the real amount charged low. Advocates of higher excise taxes on cigarettes contend that, in addition to producing revenue for the government, the tax offers to decrease the incidence of cigarette use, especially among younger people.
They maintain that the higher tax adds to the price of cigarettes. Because of the higher cigarette prices, many young people who already smoke will discontinue smoking and those do not smoke will be discouraged to take up the habit. On the other hand, adversaries of the higher excise taxes maintain that higher cigarette taxes cause escalating black market activity in cigarettes.
They also contend that the higher taxes will unjustly strain lower income groups. To analyze the effect of government’ s decision to raise taxes, knowledge of price elasticity is necessary for evaluating the entire effect of higher cigarette taxes.
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