The Cost of Smoking to the Tax-payer

I've heard several people talk about the cost of smoking to the Taxpayers in medical expenses. I've always been curious about whether the actual costs and savings (from premature deaths and taxes) of smoking are really that major, so when John Humphreys mentioned some of the statistics in a post on smoking I decided to do a more detailed examination of the costs.

I'm going to do this for 2004 simply because there's two useful government reports available for that year: The National Drug Strategy Report on The costs of Tobacco, alcohol and illicit drug abuse and The ABS's report on Tobacco Smoking.

The Facts:

  • Estimated net health costs of Tobacco: $318.4 million (National Drug Strategy)
  • Estimated net productivity costs of Tobacco: $8,009.1 million (National Drug Strategy)
  • Revenue from Tobacco Excise 2004: $5,237 million (Federal Budget)
  • Tobacco Excise per cigarette (Feb 2005): $0.22621 (Tobacco in Australia) [This is currently significantly higher]
  • Number of smokers: ~3.5 million (ABS)
  • Percentage of adults who smoke: 23% (ABS)
  • Percentage of adults who are ex-smokers: 30% (ABS)
  • Percentage of adults who are not smokers: 47% (ABS)
  • Decrease in life expectancy due to smoking: 10 years (BBC)
  • Life Expectancy: 81.2 years (Wikipedia)
  • Cost of all aged pensions (2003-2004): $19 billion(APA)
  • Number of aged pensioners (2003-2004): 1,866,000 (APA)
  • Total number of people 65 and over (2006): 2,644,374 (2006 Census) [this will be slightly higher than the 2004 numbers which I use for most of this article, but the difference would be minor and should not affect the results significantly]

The Math

  • Net Health Costs per smoker per year: $90 ($318.4/3.5)
  • Net productivity losses per smoker per year: $2,288 ($8,009.1/3.5)
  • Tax revenue per smoker per year: $1,496 ($5,237/3.5) [not counting GST or company tax on tobacco companies]
  • Portion people on pension: .71 (1,866,000/2,644,374)
  • Pension cost per pensioner per year: $10,182 ($19,000,000,000/1,866,000)
  • Cost of ten years pension: $101,820 ($10,182*10)
  • Average pension cost of extra ten years extra life: $72,292 ($101,820*.71)
  • Approximate Life expectancy of smokers, ex-smokers, and non-smokers: 75, 80, and 85 years ([.23*75]+[.30*80]+[.47*85]=81.2) [This makes the assumption that smoking for a while and then quiting only decreases your life expectancy by half that of smoking for the rest of your life. Also I should have used age at death in the following analysis, but life expectancy was easier to find, and 81.2 results in nice round figures. Since age at death would have been lower this will result in a slight bias towards higher tax rates in the following analysis]
  • Average life expectancy for a 20 year old who smokes for the rest of their life: 55 years (75-20)
  • Total health costs over 55 years: $4,950 ($90*55)
  • Total productivity losses over 55 years: $125,840 ($2,288*55)
  • Total Tax revenue over 55 years: $82,280 ($1,496*55)

Estimates of net costs

There's three ways I can see to calculate the net of the costs, and the corresponding "correct" Tobacco Excise:

Simplistic

Simply take the net health costs per a smoker of $90 a year and use that. This has the advantage of being easy to work out, and I expect most people would consider it reasonable (until they found out that the resulting tax rate is a lot smaller than the current rate). "Correct" tax rate: $0.0136 per cigarette (1,496/90=0.22621/0.0136).

Aggressively anti-smoking

Pretend the entirety of the productivity losses are a burden on the tax-payer in the form of welfare (which is obviously wrong, many of the productivity losses are borne by the individual in question, but some portion will be borne by the tax-payer). Since we are including the welfare costs in this, we need to include welfare savings as well (namely the aged pension). Net life-time cost to taxpayer: $58,498 ($4,950+$125,840-$72,292); "correct" tax rate: $0.1608 per cigarette (82,280/58,498=0.22621/0.1608).

Aggressively pro-smoking

Pretend that none of the productivity losses are a burden on the tax-payer in the form of welfare (which is obviously wrong, many of the productivity costs are borne by the individual in question, but some portion will be borne by the tax-payer), but still include the aged pension. Net life-time cost to taxpayer: -$67,342 ($4,950-$72,292); "correct" tax rate: -$0.1851 per cigarette (82,280/-67,342=0.22621/-0.1851); yes that's a subsidy almost as large as the current tax rate.

Conclusion

Obviously both the aggressively anti- and pro-smoking calculations are wrong, but they do provide some outer-bounds for the tobacco tariff (or subsidy) that can be justified by the "expense to the tax-payer" excuse. I suspect that the anti-smoking result is closer to the truth, and would oppose a subsidy regardless, but more information would be needed to confirm this.

Categories: Economics, Politics
Date: 2011-06-02 01:28:56, 6 years and 231 days ago

Leave reply

No html allowed in reply

Notify me of follow-up comments via email.