Taxation of the South African tobacco industry : with special reference to its employment effects

Van der Merwe, Rowena

Taxation of the South African tobacco industry : with special reference to its employment effects

Master Thesis

1998

Publisher

University of Cape Town

Department

School of Economics

Faculty

Faculty of Commerce

Abstract

This study examines the economic impact of cigarette excise taxes in South Africa. In particular, it looks at the economic impact of increasing excise taxes, or in effect, reducing consumption, and the resultant impact on output and employment in the economy. Real cigarette excise taxes in South Africa have steadily declined over the period 1970 to 1995. As a result there has been a concomitant decrease in the real retail cigarette price, caused primarily by the tax component. The South African government has however, since 1995, despite vociferous opposition from the industry, effected tax increases greater than expected inflation to adjust the cigarette duty back to its former levels. The tobacco industry has argued that such actions will result in job losses. The industry has argued that, regardless of its effects on physical health, tobacco plays an important role in the communities' economic health, generating employment and contributing vital revenues to government coffers, which in a country like South Africa with high unemployment, has strong political appeal. This study examines these arguments. The first part of the paper looks at the effect of taxation on consumption and government revenue. Using a price elasticity estimate of -0.6 for South African cigarette consumption, a simulation model of the government's tax policy is run. This shows that the government's policy on tobacco taxes has been non-optimal and revenue could have increased by 2 percent, had the government maintained the real value of excise duties. The results suggest that an optimal tax for the government could be set at a level higher than the current 52 percent of retail price which, contrary to industry arguments would maximise government revenue. The second part of the paper, then addresses the question of employment losses in the economy in the wake of increases in excise taxes by government. An input-output model is used and the methodology is based on the assumption that expenditure switching will occur from cigarettes to other goods and services in the economy. The model is tested using 1995 data. The study looks at the impact on output and employment from this alternative spending and examines the argument that increased excise taxes will result in job losses. The results suggest that the economic effects of increased excise taxes on cigarettes, which would result in a change in personal consumption behaviour away from cigarettes, will not have the harmful effects on employment that the industry claims. South Africa as a whole would have gained net increases in output and employment if smokers quit their habit completely or even partially during 1995. The government's current taxation policy therefore bodes well for public health, public finance, and the economy.

Description

Bibliography: pages 82-87.

Keywords

Economics

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