Tobacco Taxes & Budget Overspending

Raising taxes at any time is a bad idea. Raising them in the middle of a financial downturn however is economic suicide.

There are few things that economists can agree on – they disagree on pretty much everything! But on this one thing universal consensus exists – YOU DO NOT RAISE TAXES IN THE MIDDLE OF A RECESSION!

The reasons for this are rather obvious. Tax hikes hurt consumers (who have less disposable income), and businesses (as consumption drops). This leads to many businesses reducing their workforce, or even closing their doors. The economy contracts, and living standards fall. At a time when our unemployment levels are rising, with future increases to come as Gillard’s Job Killing Act 2009 comes into effect, now – more than ever – is certainly NOT the time to further burden business and drive up unemployment.

Thus is saddens me greatly that the Federal Parliamentary Wing of the Liberal Party is proposing to hike cigarette taxes instead of focusing on cutting Rudd’s wasteful spending. Let us make no mistake about this. The budget deficit is PURELY a result of Labor overspending – NOT external factors. As such, the response should be to cut spending – NOT introduce job killing tax hikes.

Increasing cigarette taxes will hurt the poorest Australians the most. It is an unfair, regressive tax. What’s more, countless retail outlets across the country will be hit hard by this. There is no doubt if enacted jobs will be lost – and this isn’t even getting into the descent into nanny state paternalism.

Furthermore, evidence in the US shows that tax hikes on cigarettes are a really dumb way to raise revenue. When New Jersey raised the cigarette tax 17.5 cents in 2007 they expected to bring in an additional $30 million. Not only did New Jersey not meet that target, but it ended up with a net loss of $24 million in total tax revenue from tobacco.  Maryland doubled the cigarette tax to $2 last year and cigarette sales dropped 25%, falling considerably short of projections leaving a gaping budget black hole. Much of this loss can be attributed to black market and online tobacco sales – not smoking cessation, and this is certainly an industry starting to thrive in Australia. In any event, if people do stop smoking eventually, what happens to the revenue stream then? You’ll need to raise other taxes to prop up this piece of spending.

The Liberal Party’s budget reply contained a number of good ideas. Chief among them was the creation of an impartial Parliamentary Budget Office, to provide independent advice to Parliament on fiscal matters – this is a great idea, and one I really hope is implemented. Unfortunately however, such good initiatives were overshadowed by this horrendous call for tax hikes.

With the economic vandalism Kevin Rudd is inflicting on the Australian economy, the Liberals pretty much have the free market vote locked up (unlike in 2007), so electorally such things probably won’t matter much. But that doesn’t negate the fact that it’s bad policy.

Raising taxes at any time is a bad idea. Raising taxes in an economic downturn is just policy stupidity. All believers in sound fiscal policy should oppose this tax.

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4 Responses to “Tobacco Taxes & Budget Overspending”

  1. Natalie Says:

    Agreed. Particularly on the point you raise about unfairly targeting the poor. The fact of the matter is that cigarettes are addictive and heavy smokers (who generally tend to be from lower socioeconomic backgrounds) will still buy these goods with what little money they have during the recession. This then widens the poverty gap, which is not what anyone wants, particularly in economic downturns. The Treasury has come to the same conclusion as you, too -that the revenue made from taxes on consumables such as alcohol and tobacco would be inconsequential.

    On another related note, I think that you should write a post proposing what your budget would look like!

  2. Hrgh Says:

    “There are few things that economists can agree on – they disagree on pretty much everything! But on this one thing universal consensus exists – YOU DO NOT RAISE TAXES IN THE MIDDLE OF A RECESSION!

    Uh… wait a second.

    This should read “you do not raise taxes is a recession unless you are going to spend it in a productive way”.

    Or better “do not take money out of the economy and hold onto it”.

    Even better “If you raise taxes in a recession, you better tax the people who are likely to save and give it to people who are likely to spend”.

    Best of all “It would be crazy mad to tax the poor in a recession. A sound stimulatory measure would be to tax the rich as they are likely to save, and give the tax takings to those on low incomes, as they are likely to spend. This would be a responsible action in a recession.” 🙂

  3. william Darby Says:

    always cut tax

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