Question

If you were advising a State legislator about the tax on tobacco, what would you recommend? In your explanation address the issues of tax incidence and the progressivity or regressivity of the tax

Answer 1

A tobacco tax is levied to discourage smoking . Tobacco consumers are made responsible to pay the tax . So this tax should be progressive based on quantity . Tax percentage on a larger packet of cigarette must be higher than tax percentage on a small packet . But usually excise tax or tax per unit is levied on tobacco products . Also the price elastic of demand for tobacco products is quite inelastic in nature . Regular consumers of tobacco are addicted and do not respond much to slight changes in price . Thus maximum tax incidence falls on consumers . Thus in order to curb tobacco consumption , taxes should be increased to such level that it becomes difficult for even addicts to afford tobacco .