Tobacco: Taxes and Prevalence of consumption by age groups.

 

There are several explanations for governments worldwide to continue increasing taxation of tobacco products. The main reasons are related with an economic and public health point of view.

Regarding the public health perspective, policy makers implemented higher cigarette taxes to save a substantial number of lives and reduce health care costs associated with smoking.

Secondly, taxation generates a relative stable and sustained source of revenues for governments. Also, cigarette excise taxes are inexpensive to implement and administratively easy to apply. States collected more than $17 billion in cigarette excise taxes in 2012.

As we can see by the graphs below, there is a negative relationship between cigarette consumption and cigarette taxes over the last years. While the price of tobacco growth the consumption/sales decrease and the government revenues arise.

To understand how taxation policies work, it is necessary to clarify the concept of elasticity.

The price elasticity of tobacco demand measures the responsiveness of cigarette consumption to changes in the price of cigarettes.
The demand for tobacco is inelastic, it means that people will not easily change their behavior regarding increases in price. However, as we can see by the graphs the demand for cigarettes has been decreasing since the 80’s and it could be related with several factors, for instead health issues, income effect and substitution effect.
The elasticity may not be always constant and may change between different ages.

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The graph above results from study analysis made by Kevin Callison and Robert Kaestner (2014) and shows the effect of large cigarette tax increases on the smoking behavior of adults ages 18–74.
The elasticity is – 0.015, which is very small and not statistically significant. It indicates that a 1 percent increase in the cigarette tax would drop smoking among adults by 1.5 percent.

As we can perceive by the graph above, the elasticity change across the different ages.

For ages between 18-34 the elasticity is 0.040, which means that when the price increases by 1 % the quantity demanded decrease by 4 %.

Regarding the group with ages between 35-54 the elasticity is -0.013, it means when the price rises by 1 %, the quantity demanded falls by 1.3 %. and in the last set of ages 55-74 the elasticity is -0.022, when the prices arise by 1% the quantity demanded decreases by 2.2%

In conclusion, the demand for tobacco is more elastic in the first age group 18- 34. It makes sense because younger people tend to be more sensitive than adults to increases in tobacco prices because they have been smoking for less time and may be not so addicted. Furthermore, the fraction of disposable income spent on cigarettes by the young smoker is likely to be greater than that of an adult smoker.

The fact that older people reduced more the demand for tobacco could be related to the fact that they may be more awareness with their healthy or simply because they are a minority.
 

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Economic Arguments for Legalizing Cannabis: Can Legalization Raise Government Revenue?

The Freetown Christania – a self-proclaimed autonomous neighborhood in Copenhagen – has been subject to massive police raids against the open-air illegal cannabis market, known as Pusher Street. However, the fight against illegal cannabis does not seem to be working, and last month a shooting accident in Christania resulted in one dead police officer. After more than two decades with failed attempts to clear Pusher Street, the discussion about the the potential of the Danish Government legalizing cannabis is still as relevant as ever. To support the legalization of cannabis, one may, besides the social impacts, also draw on economics reasoning by looking at its effect on public finances.

As with any other government regulation or implementation, the Danish Government should carry out a cost-benefit analysis, to weight the potential costs of legalizing cannabis against the benefits. In the report “Marijuana Legalization, Government Revenues, and Public Budgets: Ten Factors to Consider” (2016) by Beau Kilmer, which has been carried out for the state of Vermont (U.S.), potential costs and benefits of legalizing cannabis are discussed. Just like Vermont, the Danish Government should take into consideration the following budgetary effects: (1) current costs of enforcing marijuana prohibition, (2) the one-time cost of creating a new regulatory system in addition to, (3) the annual costs of maintain that system, and (4) the potential tax revenue from residents and non-residents. If the effects of 2-4 outweigh the effect of 1, then legalizing cannabis may have positive budgetary effects for the Danish State.

By legalizing cannabis, the main source of government revenue would a result of the possible taxation and fees. In choosing the tax rate, the government must decide on a balance between raising revenue and limiting the use of cannabis. It is a well-known fact that taxes distort the market and causes people to change behavior. A low tax rate is desirable to eliminate the black market, however a high tax rate is desirable to induce people to consume less cannabis. Therefore, the price and tax should be set just below the black market price to limit consumption and prevent citizens from buying from the black market.

Furthermore, the government should decide if it wants to tax production or consumption of cannabis, and if so, the government should determine whether the taxation will be fixed on the price, the weight, or the THC content. A tax on price will result in decreased revenue as prices fall, a tax on the weight may induce more potent products, and taxing the THC requires significant resources to set up and maintain such a regime. The government should also look to nearby countries, who might also legalize cannabis in the nearby future, as to see what kind of taxation model they consider implementing.

Revenues that the government may collect goes beyond sales and taxes on cannabis. The legalization may result in income taxes for those in the new industry and influence the consumption on other taxable goods. Thus, one must take into account the general equilibrium effects from legalizing and taxing cannabis, when evaluating the total government revenue that can be raised.  Data shows that positive revenues from taxation are very likely. For example, Colorado, which legalize recreational marijuana in 2012, raised in 2015 $135 million in taxes and fees from sales.

Copenhagen officials have not pushed to legalize cannabis since 2014, but maybe now is the time to take a new approach of legalizing cannabis to combat the crimes happening in Christiania while improving the public finances.

The Wealthy and the logistics of taxing their property: an overview of the new property tax

The creation of a new additional progressive tax on property is currently being discussed in Portugal. It is still unclear which properties will be affected as only those whose value is greater than 500,000 or 1 million euros (the decision on the value is being discussed) will be taxed. The new tax is an addition to the Real Estate Municipal Tax (IMI in Portuguese) which is planed to decrease in 2017 from a maximum level of 0,5% to 0,45%, while government revenue from this new additional tax will likely fall somewhere in the 100 million to 200 million euros range1.

The Portuguese real estate market has been subject to constant changes in its fiscal policies, which have potentially deterred much needed investment. According to Reis Campos, from the Confederation of Portuguese Construction and Real Estate, the decrease in investment due to the new tax will cost Portugal more than the gained government revenue1. This could be particularly true for foreign investors (which represent roughly 23% of market investment) who can invest elsewhere in search of more stable fiscal policies2. Furthermore, housing properties have been a positive saving scheme for middle incomers as renting property can be more profitable than long-term saving deposits with low-interest rates, especially considering the recent rise in tourism.

Though the new tax is only meant to target wealthy property owners, it seems unlikely they will be the only ones affected3. People who inherit property might not be able of affording an additional tax, as well as the maintenances and other housing-related expenditures. Furthermore, landlords can simply pass on the added tax costs to their tenants, potentially affecting common middle and low class citizens.

While it has been established that people with two non-luxurious houses will not pay the new tax, logistical issues need further improvement for this tax to remain socially fair4. The previous additional property tax had considerable short comings as it only applied to houses worth over one million euros (meaning people who had ten properties each worth just under one million euros didn’t have to pay the tax, but people with a single property worth marginally over one million euros did). This new tax helps address this issue (as it takes into consideration the total value of all properties people have, apart from the main family house) but is still far from optimal.

If the government’s goal is to target wealthy citizens rather than middle-incomers, then it would make sense to look at people’s liquid wealth rather than their properties assets5. The new tax could potentially allow for someone who buys himself a house worth just under half a million not to be taxed while someone who gets a loan to buy a house worth slightly over half a million to be taxed, whilst still paying off the loan and respective interests. Therefore, “wealth” should not be measured in terms of assets, but rather in what one can purchase on their own. As such, a solution could be a tax exemption for people still paying off house loans back.

The new tax therefore presents a hard challenge to Portuguese policy makers given the need to prevent a massive market destabilization in real estate, as well as reassuring investors whilst minimizing potential unwanted consequences to lower-incomers and middle classes.

By: Tiago Polleri Falcão

Bibliography:

1 –

http://expresso.sapo.pt/politica/2016-09-16-Um-imposto-em-construcao-mas-que-ja-assusta-o-sector

2 –

http://www.jornaldenegocios.pt/empresas/imobiliario/detalhe/novo_imposto_sobre_imoveis_e_assustador_para_os_investidores_estrangeiros.html

3 –

http://observador.pt/2016/09/15/governo-e-bloco-negoceiam-novo-imposto-sobre-patrimonio-acima-de-500-mil-euros/

4 –

https://www.publico.pt/economia/noticia/governo-prepara-novo-imposto-para-proprietarios-com-mais-patrimonio-1744171

5 –

http://expresso.sapo.pt/economia/2016-09-15-Proprietarios-consideram-novo-imposto-sobre-patrimonio-imobiliario-um-garrote-fiscal

 

Taxing sharing: is sharing really caring?

A saying goes that “sharing is caring” – but how about the sharing economy? As of the past decade, the economy has been changing by the upcoming of new businesses taking part in the “shared economy”. The shared economy is based on individuals sharing resources – physical, human or intellectual – usually through a digital marketplace provider. Thus, an individual may provide a service or rent an asset they control, to some other individual or group, and the shared economy business provides the platform for contact between provider and consumer. For example in the case of the popular ride-sharing service, Uber, one individual provides a taxi service to another individual, where communication and payment is enabled by a smartphone app. Regarding this new kind of shared businesses, there are several issues that needs to be addressed, especially in terms of taxing.

The shared economy certainly entails many benefits. To mention a few: it’s providing services and goods at cheaper costs for consumers, enabling providers to earn an extra income, recycling and lending eases the pressure on the world’s limited resources, etc.

However, the drawbacks of taxing the shared economy businesses should not be ignored. The issues arise, because in contrast to the traditional businesses with a good/service provider and a consumer, the shared economy includes an additional party, usually a digital marketplace provider, enabling the transactions (http://www.pwc.com/us/en/industry/entertainment-media/publications/consumer-intelligence-series-taxing-the-sharing-economy.html). As in the case of Uber, besides the chauffeur and the consumer, there is the provider of the app. The payment is made from consumer to provider, through the digital platform. The owner of the digital platform take a cut of the payment.

A new tax system must address who, where and how this shared economy should be taxed. Should the provider or the business be paying the income tax? Where – in which country and at which government level – should the corporate tax be collected? How should the shared economy be taxed in comparison to traditional businesses?

Currently, it is the service providers, with little experience with requisite tax record-keeping, who is responsible for the tax reporting. The system is ineffective, since it is both time consuming for the providers and costly for the tax administrators. If the digital platforms are required to classify the providers as employees, then it would be the companies’ responsibility to ensure income taxes, unemployment taxes, etc. are being paid.

The sharing companies will often avoid paying corporate taxes in the countries they operate by utilizing the opportunity for international tax planning.  If the new form of businesses goes untaxed, government inaction will result in distortionary market effects and potentially reduce economic growth. Also, if the sharing companies outcompete existing traditional companies, and these new companies are untaxed, the government will face revenue losses (http://www.forbes.com/sites/taxanalysts/2015/07/14/tax-challenges-for-the-uber-economy/#6ea82dfc387a).

In conclusion, there are several issues regarding the taxation of the shared economy. In my opinion, if our current tax-system is not adapting quickly to the changing economy and the related tax issues, this may, everything else equal, result in large revenue losses for the government. Thus, the shared economy may not be so caring – at least not concerning the public finances.

Oil Prices around the world and Taxation on fuel prices in Portugal.

As we may all know, oil prices had some variations all over the past few decades and it’s truthful to affirm that the price of this resource is decreasing.

According Kenneth Rogoff “The stunning fall in oil prices, from a peak of $115 per barrel in June 2014 to under $35 at the end of February 2016, has been one of the most important global macroeconomic developments of the past 20 months.”

Firstly, it is important to analyze the main causes behind the drop in oil prices to understand their macroeconomic effects in the economy. This can be explained by using the basic concepts and rules of supply and demand.
The plunged in prices can be explained by several factors:

The producers of oil and fuel continued to increase the production of oil but, at the same time, occurs that some economies of the big countries like United States, China and Japan had slowing growth in the emerging world so their demand for oil have decreased.
Also, other alternatives for fuel appeared. This is called the substitution effect and tends to happen when a good can be used in place of another good. For instance, Japan have substituted oil for natural gas and for other alternative fuel sources.
While the demand for oil decrease and the quantity supplied remains the same we will have an excess of supply and so producers must have to drop the price of the product to sell all the excess of stock produced before.

Despite the decrease in fuel prices, Portugal is on the list of the five countries with higher fuel prices.

Differences in tax policies are of course the main reason for the wide variations in fuel prices. The Portuguese government believes that can take advantage in the fact that oil prices are lower and implemented some taxes on diesel and gasoline prices to obtain more tax revenue to the country.  According to date from Directorate-General Energy this policy may have an effect in other aspects:

Governments use fuel taxation to internalize external costs, for example, if prices and transport duties covered all social costs, the demand for transport would be economically optimal for the welfare of society as a whole, since prices would reflect all health, environmental and infrastructure costs.

Moreover, these taxes on fuel prices could be benefic to the environment because with too high prices the demand for fuel will decrease, so industries will try to improve other resources like electricity or sustainable biofuels that are not pollutants. Also, people will prefer use non-motorised or public transport and will do fewer trips.

At least, other important thing to have in consideration is that in Spain the price of fuel is lower so portuguese do not mind to travel further to fill the tanks and this could be problematic to the portuguese economy.

 

Mariana Esteves Bêa

Spain’s unsustainable unemployment rate: What can the government do to speed recovery?

Spain has experienced an almost unsustainable level of unemployment, as the unemployment level rose from 7.9% in April 2007 to 24.4% in April 20121. Despite many European economies now showing signs of improvement and growth (including the Spanish economy) leading to a reduction in unemployment, unemployment in Spain has taken a considerable time to improve. Up until July 2016, Spanish unemployment continued at over 20% and it is currently still at a staggering 19.6% being the second highest unemployment rate in Europe, after Greece2.

It should be noted that in 2008 the Spanish labor market vastly differed from other European labor markets.  Whilst some Spanish economic sectors had multiple policies protective of permanent workers’ rights, which made firing workers hard and expensive, other sectors were exact the opposite. In fact, before the 2008 crisis began, almost one third of Spanish workers were on temporary contracts, a much higher percentage than other European economies3. It was therefore easy for some companies to fire workers, while hard for other companies to do the same.

This arguably made labor mobility inefficient in the Spanish labor market which could help explain the unusually high level of unemployment. One must also consider low education levels in many southern regions of Spain, as well as the contraction of labor-intensive industries, such as the Spanish construction industry, as other causes which helped increase the unemployment figures4. Furthermore Spain has a lack of jobs available for workers entering the labor market (nearly 43.9% of workers under 25 year of age are currently without a job) which further boosts unemployment numbers5.

Spain is therefore struggling to manage the allocation of unemployment benefits given its constraints (Spain currently has the third highest budget deficits in Europe, meaning they are currently spending more money than they collect from taxes6). This is the main problem. Having such a high percentage of the work force unemployed means the Spanish government collects less revenue from taxes while at the same time having to deal with an increase in people claiming unemployment benefits.

In order to face these problems, the Spanish government should first try to reduce the labor mobility disparities between permanent and temporary jobs. In other words, protective jobs policies should be increased for temporary forms of employment and decreased for permanent ones. This opinion is shared by economists, such as Marcel Jansen from the Universidade Autónoma de Madrid, who argue balanced labor mobility would help maximize the efficiency of the labor market thus reducing unemployment4. A reduction in unemployment implies more tax revenue and less unemployment benefit expenditure. If this is to be the case the Spanish government could then have a bigger budget for other unemployment reducing policies such as increase training/education in largely unskilled regions of Spain as well as public investment projects (possibly to help the domestic construction industry which hasn’t yet recovered from the crisis) leading to a further decrease in the unemployment level.

 

Sources:

1 – http://www.tradingeconomics.com/spain/unemployment-rate

2 – https://www.statista.com/statistics/268830/unemployment-rate-in-eu-countries/

3 – http://fortune.com/2015/12/01/spain-job-market/

4 – http://www.nytimes.com/2016/05/03/upshot/spains-jobless-numbers-almost-look-like-misprints.html?_r=0

5 – http://www.tradingeconomics.com/spain/youth-unemployment-rate

6 – http://www.bloomberg.com/news/articles/2016-03-21/these-eight-eu-countries-are-in-the-budget-danger-zone

 

From Main Street To Wall Street: Why The 99% Felt The Bern

After the financial meltdown in 2008 many people took to the streets to show their despair. Their slogan was “we are the 99%” and they were referring to the increase in income inequality experienced in many countries. In 2015 another group emerged with the slogan “feel the Bern”. Their slogan was in support of the democratic presidential candidate Bernie Sanders during the U.S. primaries. The popularity of the self-described socialist Bernie Sanders baffled many political commentators. Bernie Sanders advocated for tuition-free public universities, universal health care, reform of Wall Street and higher marginal taxation of the 1%.

Why the sudden spur in the interest of income equality? In the last couple of decades after the 1970´s income inequality has increased in many countries. To get a sense of the increase in inequality an intuitive measure is the share of total income that goes to the top 1% of the population. Pre tax and pre transfer income from U.S. tax returns data show that the share of total annual income received by the richest 1% has more than doubled from 9% in 1970 to 22% in 2015. In 2015 the richest 10% of the population in the U.S. received 50% of the total annual pre tax and pre transfer income. This long-run trend of growing inequality is also visible in many other countries around the world, however especially prominent in Anglo-Saxon countries.

So why should we care about the growing gap between rich and poor? Evidence increasingly suggests that excessive inequality has adverse effects on growth and social mobility. The Great Gatsby curve shows how higher levels of income inequality is associated with less intergenerational mobility. Intergenerational mobility refers to the changes in social status between different generations within the same family. Low social mobility means that your economic status is mostly pre-determined by factors such as family background and gender instead of factors such as ability and drive, i.e. your economic status is mostly determined by the “birth lottery”. Because inequality may hold people down many fear that high inequality could threaten the stability of societies. This could very much be the case if we look at current events such as Brexit, the rise of far right populists in Europe and Donald Trump in the U.S. presidential campaign. A widening wealth gap may have a negative effect on economic growth by reducing the number of educated workers, as low-income families are known to invest less in education. Excessive income inequality may also encourage rent seeking as people become more focused on grabbing a slice of the pie instead of making the pie larger.

Acknowledging the negative sides of increasing income inequality is not to say that all inequality is bad. To keep incentives aligned we need to accept some income inequality, however as with many other things in life and the story of Goldilocks: “Not too much, not too little, but just right.”

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