Gary becker, Nobel Prize in Economics in 1992, showed that tobacco use is sensitive to tax increases, especially in the long term. Meanwhile, in the short, the model created by the American economist shows a greater stubbornness in the consumption of smokers, or, in economic terms, a lower elasticity of demand for cigarettes and rolling tobacco. This behavior, empirically repeated and verified in multiple studies, is used by almost all governments when raising taxes. This tax increase is taught to first-year economics students as one of the quickest ways to replenish the ever-needed treasury coffers and has become a classic for any finance minister who wants to raise more.
But let’s look more long-term. There is no doubt that these tax increases affect tobacco consumption and that they contribute to reducing its undesirable effects, measured both in the cost of human lives, as well as in healthcare or dependency spending. For this reason, the European Union, through the Commission, has been trying for decades to establish similar rules of the game for the whole of Europe that avoid tobacco trafficking or situations far from the necessary fairness.
The new standard should establish a clear difference between products that use combustion, much more harmful to health, and those that do not
At present these rules are defined in the Directive 2011/64, whose objective is “… to guarantee the proper functioning of the internal market and, at the same time, a high level of health protection, as required by Article 168 of the Treaty on the Functioning of the European Union”. One of the regulator’s objectives is “to maintain an economic union, the characteristics of which are similar to those of an internal market, within which there is healthy competition. With regard to tobacco, the achievement of this objective presupposes that (…) no distorts the conditions of competition and does not impede their free movement within the Union “. In short, the ultimate aim of the legislator is to protect the health of Europeans while maintaining the smooth functioning of the internal market by establishing fair and, as regards excise, harmonized structures.
When the Commission is about to issue a new directive, there are two questions to be asked: whether the previous one has been efficient and what the new one should contemplate in order to adapt to the new needs of Europeans.
First health, then taxes
To the first question we have tried to answer Mayte ballestar, Ismael Sanz and I in a recent article in Applied Economic Letters. To empirically demonstrate whether the directive generated fiscal homogeneity between countries, we analyzed the effect of special taxes on tobacco consumption in Europe using an Artificial Intelligence model called Automated Nested Longitudinal Clustering (ANLC). The main advantages of this method are the ability to handle continuous variables such as fiscal variables, the automatic selection of the number of clusters, and the ability to analyze all types of data sets, large and small, even in real time.
The results are transparent. Our analysis robustly shows that tobacco consumption in the different countries of the European Union responds differently to excise duties and its sensitivity (elasticity) is not constant over time, which means that the current model drawn by Directive 2011/64 has not achieved its objective of efficiency and harmonization.
This result is relevant when the new directive aims to establish for the whole Union, for the first time, the tax bases of tobacco substitute products: electronic cigarettes, heated tobacco (HTP), etc. Today, each country regulates these products differently, confusing users and avoiding a single European response. This fact is of singular importance at this time, when despite the intense scientific debate that exists, most of the empirical evidence indicates that products such as heated tobacco and, in general, vaping are less harmful than combustible products, given the absence of combustion. In addition, they are effective as a public health element in the smoking cessation process. In fact, they seem to be more effective than other formats, as recent analyzes in prestigious scientific journals such as The Lancet, New England Journal of Medicine, etc.
It is necessary to ask, once again, to listen more to experts and scientists and less to the pressure groups that have so much influence on European governments
Without going into the scientific debate, I do dare to ask that the European authorities be very careful when legislating and use science as the main guide of the entire procedure. That same science has been used to apply harm reduction concepts in all economic sectors, from food to alcohol to automobiles. In these, the most damaging products have a higher tax burden than those that produce the least damage. If an assessment based on the specific risk profile of each product category exists, among others, in the energy sector, why not do the same in tobacco? Why not take advantage of this opportunity to reduce the inequity of our society, drawing a more efficient protection of public health?
Perhaps it is important to ask, once again, that experts and scientists be listened to and not the pressure groups that currently have so much power in European governments. Perhaps it is important to ask, once again, that the best solution be found for European citizens, both from the point of view of efficiency and tax justice and, much more important, from the point of view of the health of Europeans. Perhaps, in conclusion, it is important not to throw another occasion out the window.
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New tobacco directive: listen more to scientists and less to lobbyists