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Taxation on Smoking- Article by Abdul Sattar Qamar

Instead of increasing taxes on daily use items, Government should expand tax-net and hike tax on smoking as the analysis finds that higher state taxes on smokers have produced sharp declines in consumption even in Pakistan where 2 % decrease was noticed in production last year when the taxes were enhanced.Pakistan's two major companies are producing 60 billion cigarettes per annum legally. and 20 billion cigarettes are manufactured by the unorganised sector.or smuggled .Government is earning Rs.43 billion of foreign exchange and Rs.16 billion tax-revenue from this industry.Tobacco is the second major cause of death in Pakistan where  274 smoking people die daily in Pakistan, 500 people are admitted to hospitals daily. Tobacco is the cause of at least 85 percent case of lungs cancer, cancer of mouth, throat, kidney, bladder and stroke besides chronic bronchitis and emphysema.Passive smoking is hazardous to unborn babies, children and adults.To develop the public opinion for gradual prohibition of smoking through increasing taxation, International Union Against Tuberculosis and Lung Disease and Coalition for Tobacco Control (CTC) Pak jointly organised a Media training Workshop on "Tobacco Taxation" The Experts & Economists use estimates of the price elasticity of demand to quantify the impact of a change in price on consumption. Formally, the price elasticity of demand is defined as the percentage change in consumption resulting from a 1% increase in price. While a relatively wide range of estimates has been produced for the price elasticity of demand for cigarettes, most of the estimates from the USA and other high income countries tend to fall in the relatively narrow range from −0.25 to −0.50.5, 9, 10 This implies that if cigarette prices rise by 10%, overall cigarette smoking will fall by between 2.5 and 5%.
The changes in smoking that result from the price changes are the result of changes in both the number of smokers and the amount of cigarettes consumed by smokers. The changes in the number of smokers result from changes in smoking cessation, initiation, and reinitiation. Econometric studies employing survey data on individuals produce separate estimates of the impact of price on the number of smokers (reflected in “smoking participation” elasticities) and on the cigarette consumption of smokers (reflected in “conditional demand” elasticities). Several recent studies imply that half or more of the effect of price on overall cigarette smoking results from reductions in the number of smokers.11, 12 Moreover, a number of recent studies conclude that youth smoking is relatively more sensitive to price than adult smoking, with some estimates implying that teen smoking is up to three times more sensitive to price than adult smoking.5, 9, 10
The amount of decline in smoking is directly tied to the size of the tax increase, the analysis shows.Cigarette sales fell 18% in North Carolina last year after the tax was raised in two steps to 35 cents from a nickel. The tobacco-growing state resisted higher cigarette taxes until 2005. Elsewhere:•Connecticut has increased its tax to $1.51 from 50 cents per pack in 2002. Since then, per capita consumption of cigarettes has fallen 37%.•New Jersey raised its tax to $2.40 from 80 cents in 2002. Smoking has dropped 35%.•California raised its cigarette tax to 87 cents per pack in 1999 but hasn't changed it since. Smoking is down 18% since the tax increase. By comparison, South Carolina has kept its lowest-in-the-nation cigarette tax at 7 cents since 1977. Cigarette consumption there has fallen 5% since 2000.As Congress considers raising the federal cigarette tax to $1 per pack, the nation may be about to experience one of the biggest one-time declines in smoking, health experts and economists say. "I expect a bigger drop than almost anything we've seen before," says Frank Chaloupka, a University of Illinois economist who has studied the effect of taxes on smoking.He predicts that smoking will drop 6% if the 61-cent-per-pack tax hike is passed, taking the levy to $1 a pack from 39 cents. The Senate last week approved the increase as a way to pay for expanded government health care for children. The House has proposed a 45-cent increase. President Bush has threatened to veto the bill over the increased cost of the health program.Nationwide, the number of cigarettes smoked fell last year to 1,293 per capita from a peak of 2,095 per capita in 1976, according to "The Tax Burden on Tobacco," an annual industry report. Research shows that health concerns, tax hikes and higher retail prices all have played a role in the decline. Smoking falls 2.5%-5% for every 10% increase in the price of cigarettes, according to the Congressional Budget Office. Thomas Briant, executive director of the National Association of Tobacco Outlets, agrees that consumption will fall about 6% if a $1 federal tax is imposed but says the high tax will have negative effects. State governments will suffer a sharp decline in revenue, and black-market sales and thefts will increase to avoid the draconian tax, he says."Using taxes to legislate use of a legal product is not good public policy," Briant says."Nobody should cry because of lower consumption of a product that kills half the people who use it," says Danny McGoldrick, vice president of research at the Campaign for Tobacco-Free Kids. Tobacco company documents provide clear evidence on the impact of cigarette prices on cigarette smoking, describing how tax related and other price increases lead to significant reductions in smoking, particularly among young persons. This information was very important in developing the industry's pricing strategies, including the development of lower price branded generics and the pass through of cigarette excise tax increases, and in developing a variety of price related marketing efforts, including multi-pack discounts, couponing, and others.Pricing has long been one of the most important marketing strategies employed by tobacco companies in the USA and around the world. In the USA, the rise of American Tobacco Company was in large part due to the aggressive pricing strategies pursued by James Duke, made possible by the cost advantages he achieved from being the first cigarette producer to move from hand rolling of cigarettes to mass production using the Bonsack cigarette machine, invented in 1880.1 This allowed Duke to cut prices for his brands to half of the cost of the typical hand rolled cigarette, put a much larger share of the revenues generated from cigarette sales into an aggressive advertising and promotion campaign, and still earn him significant profits. Using this combination of aggressive pricing and advertising, along with a variety of other business strategies that would soon become illegal under the emerging US antitrust laws, Duke forced his competitors to either join him or drove them out of the market. In less than a decade, Duke's consolidation of the US cigarette industry created the American Tobacco Company, with control over more than 90% of the cigarette market. During this time, in large part because of these much lower prices and more aggressive marketing efforts, per capita cigarette consumption in the USA rose from less than one half cigarette per year in 1870 to 35 cigarettes per year in 1890. Cigarettes, however, were a relatively small part of the US tobacco markets at the time.The profits resulting from this monopoly power in the cigarette markets led American Tobacco to move into the markets for other tobacco products, subsidising the same types of aggressive pricing and marketing strategies that eventually gained it a significant share of these markets as well. Perhaps most important among these strategies were the “fighting brands”—very low priced cigarettes and other tobacco products, including some priced below manufacturing costs—that were used to drive competitors from the market.1 These and other anti-competitive practices eventually led to the 1911 breakup of American Tobacco Company under the Sherman Antitrust Act. Four tobacco giants emerged from the breakup: American Tobacco Company (ATC), RJ Reynolds Tobacco Company (RJR), Liggett & Myers Tobacco Company (L&M), and P Lorillard Company. Over the next two decades, these companies primarily competed through new product development (for example, Camel cigarettes containing a premium blend of tobacco sold at a premium price2), advertising, including ads targeting women (for example, “Reach for a Lucky instead of a sweet”) and other efforts. Because of their successful marketing strategies, three of these four companies came to dominate the US cigarette markets, with about 90% of the US markets controlled by RJR (41.6%), L&M (26.6%), and ATC (21.2%) by 1925.3 In addition, some strategies that helped grow the markets in the aftermath of the breakup were clearly price based, such as the distribution of free cigarettes to American soldiers during the first world war. By 1930, annual per capita consumption had grown to 977 cigarettes and cigarettes had become the dominant form of tobacco use.
Marketing data on adult price sensitivity from Lorillard similarly show that young adult smokers were the most sensitive to price.42 For example, their 1991 tracking survey included two price related questions, one based on which characteristic of cigarettes would be most important if the smoker were to switch to another brand (taste, low tar and nicotine, or price) and a second based on whether or not the smoker bought a brand other than their usual because it had a lower price or greater value among the brands available. When broken down by age groups: “it is clear that the younger adult, 18–24 smoker group, although still smoking a full price brand, “claim” a greater sensitivity to price than the older age groups. Furthermore, among those who claim to shop for price, it is the younger age group that exhibits the highest switching rate.” As discussed more fully below, it is often price related promotions that contribute to brand switching among younger smokers.
As these and other documents clearly demonstrate, tobacco companies were concerned about the impact of price on smokers in different age groups, particularly the younger groups on whom their future success depended. Their own internal marketing studies and their reviews of academic studies on this issue clearly indicate the industry's recognition that price is a particularly important determinant of smoking behaviour among the young.
Pricing strategies :
As described above, for much of its history, cigarette industry pricing strategies have been characterised by price leadership where, typically, the dominant firm of the time will initiate a price increase or decrease and the others in the industry will follow almost immediately with identical changes in their prices. An interesting 1976 report from the business planning and analysis division of Philip Morris on “Pricing policy” clearly illustrates that the firms in this industry understand this and that it has some impact on their own pricing strategies.43 By way of providing some background, the report began with this description of the industry's pricing behaviour: “The cigarette industry is characterized by economists as a “kinky oligopoly”. This charming term implies that the general price level is determined by a small number of firms (price leaders); that no economic advantage can be obtained by any one firm pricing below the general price level; and that major disadvantages accrue to a firm which attempts a price above the general level. In short, the general price level results from some sparring among the potential price leaders, after which the rest of the industry accepts the resulting price structure.”
Numerous econometric studies have clearly demonstrated the impact of price on cigarette smoking. These studies conclude that higher cigarette prices resulting from increased cigarette taxes and/or industry initiated price increases induce cessation, prevent relapse among former smokers, reduce initiation, and lower the number of cigarettes consumed by continuing smokers. In addition, this research demonstrates that changes in cigarette prices have their greatest impact on younger, lower income, and/or less educated persons.
 Interestingly, in a memo from around the same time, Johnston discusses the effects of higher food prices on overall cigarette demand. In this memo, he notes that it is possible that the significant increases in food prices (particularly meat prices) that were occurring in the late 1980s, could have “a small effect on per capita cigarette consumption”, but that because of a rapid rise in inflation adjusted per capita disposable income, the effects were more likely to be negligible.
Tobacco smoking is the practice where tobacco is burned and the vapors either tasted or inhaled. The practice began as early as 5000–3000 BC. Many civilizations burnt incense during religious rituals, which was later adopted for pleasure or as a social tool and religious ceremonies.Tobacco was introduced to Eurasia in the late 16th century where it followed common trade routes. The substance was met with frequent criticism, but became popular nonetheless.
German scientists formally identified the link between smoking and lung cancer in the late 1920s leading the first anti-smoking campaign in modern history. The movement[clarification needed What movement?] failed to reach across enemy lines during the Second World War, and quickly became unpopular thereafter. In 1950, health authorities again began to suggest a relationship between smoking and cancer.[6] Scientific evidence mounted in the 1980s, which prompted political action against the practice. Rates of consumption from 1965 onward in the developed world have either peaked or declined.However, they continue to climb in the developing world.

Smoking is the most common method of consuming tobacco, and tobacco is the most common substance smoked. The agricultural product is often mixed with other additives and then pyrolyzed. The resulting vapors are then inhaled and the active substances absorbed through the alveoli in the lungs. The active substances trigger chemical reactions in nerve endings, which heightens heart rate, memory, alertness,[11] and reaction time. Dopamine and later endorphins are released, which are often associated with pleasure.As of 2000, smoking is practiced by some 1.22 billion people. Men are more likely to smoke than women, though the gender gap declines with younger age.
Many smokers begin during adolescence or early adulthood. Usually during the early stages, smoking provides pleasurable sensations, serving as a source of positive reinforcement. After an individual has smoked for many years, the avoidance of withdrawal symptoms and negative reinforcement become the key motivations to continue.Smoking's history dates back to as early as 5000–3000 BC when the agricultural product began to be cultivated in South America; consumption later evolved into burning the plant substance either by accident or with intent of exploring other means of consumption.The practice worked its way into shamanistic rituals. Many ancient civilizations, such as the Babylonians, Indians and Chinese, burnt incense as a part of religious rituals, as did the Israelites and the later Catholic and Orthodox Christian churches. Smoking in the Americas probably had its origins in the incense-burning ceremonies of shamans but was later adopted for pleasure or as a social tool.The smoking of tobacco and various hallucinogenic drugs was used to achieve trances and to come into contact with the spirit world.
Eastern North American tribes would carry large amounts of tobacco in pouches as a readily accepted trade item and would often smoke it in pipes, either in defined ceremonies that were considered sacred, or to seal a bargain,[18] and they would smoke it at such occasions in all stages of life, even in childhood. It was believed that tobacco was a gift from the Creator and that the exhaled tobacco smoke was capable of carrying one's thoughts and prayers to heaven.
Apart from smoking, tobacco had a number of uses as medicine. As a pain killer it was used for earache and toothache and occasionally as a poultice. Smoking was said by the desert Indians to be a cure for colds, especially if the tobacco was mixed with the leaves of the small Desert Sage, Salvia Dorrii, or the root of Indian Balsam or Cough Root, Leptotaenia multifida, the addition of which was thought to be particularly good for asthma and tuberculosis.In 1612, six years after the settlement of Jamestown, John Rolfe was credited as the first settler to successfully raise tobacco as a cash crop. The demand quickly grew as tobacco, referred to as "brown gold", reviving the Virginia join stock company from its failed gold expeditions.In order to meet demands from the Old World, tobacco was grown in succession, quickly depleting the soil. This became a motivator to settle west into the unknown continent, and likewise an expansion of tobacco production. Indentured servitude became the primary labor force up until Bacon's Rebellion, from which the focus turned to slavery.This trend abated following the American revolution as slavery became regarded as unprofitable. However, the practice was revived in 1794 with the invention of the cotton gin.[25][page needed]

Frenchman Jean Nicot (from whose name the word nicotine is derived) introduced tobacco to France in 1560, and tobacco then spread to England. The first report of a smoking Englishman is of a sailor in Bristol in 1556, seen "emitting smoke from his nostrils". Like tea, coffee and opium, tobacco was just one of many intoxicants that was originally used as a form of medicine. Tobacco was introduced around 1600 by French merchants in what today is modern-day Gambia and Senegal. At the same time caravans from Morocco brought tobacco to the areas around Timbuktu and the Portuguese brought the commodity (and the plant) to southern Africa, establishing the popularity of tobacco throughout all of Africa by the 1650s.
Soon after its introduction to the Old World, tobacco came under frequent criticism from state and religious leaders. Murad IV, sultan of the Ottoman Empire 1623-40 was among the first to attempt a smoking ban by claiming it was a threat to public moral and health. The Chinese emperor Chongzhen issued an edict banning smoking two years before his death and the overthrow of the Ming dynasty. Later, the Manchu of the Qing dynasty, who were originally a tribe of nomadic horse warriors, would proclaim smoking "a more heinous crime than that even of neglecting archery". In Edo period Japan, some of the earliest tobacco plantations were scorned by the shogunate as being a threat to the military economy by letting valuable farmland go to waste for the use of a recreational drug instead of being used to plant food crops.
Religious leaders have often been prominent among those who considered smoking immoral or outright blasphemous. In 1634 the Patriarch of Moscow forbade the sale of tobacco and sentenced men and women who flouted the ban to have their nostrils slit and their backs whipped until skin came off their backs. The Western church leader Urban VII likewise condemned smoking in a papal bull of 1642. Despite many concerted efforts, restrictions and bans were almost universally ignored. When James I of England, a staunch anti-smoker and the author of a A Counterblaste to Tobacco, tried to curb the new trend by enforcing a 4000% tax increase on tobacco in 1604, it proved a failure, as London had some 7,000 tobacco sellers by the early 17th century. Later, scrupulous rulers would realise the futility of smoking bans and instead turned tobacco trade and cultivation into lucrative government monopolies.
By the mid-17th century every major civilization had been introduced to tobacco smoking and in many cases had already assimilated it into the native culture, despite the attempts of many rulers to eliminate the practice with harsh penalties or fines. Tobacco, both product and plant, followed the major trade routes to major ports and markets, and then on into the hinterlands. The English language term smoking was coined in the late 18th century; before then the practice was called drinking smoke.
Growth remained stable until the American Civil War in 1860s, when the primary labor force shifted from slavery to share cropping. This, along with a change in demand, lead to the industrialization of tobacco production with the cigarette. James Bonsack, a craftsman, in 1881 produce a machine to speed the production in cigarettes.

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