Raises taxes on alcohol and tobacco.

According to the article, http:news.bbc.co.uk/2/hi/business/8449252.stm  This article talks about in country Greek, How raises taxes on alcohol and tobacco are affected on country’s debt as well as the effects on consumers. taxes are often a source of heated political debate. A tax raises the price buyers pay and lowers the price sellers receive. For example in country Greek, tax per liter of alcohol rises from 11.4 euro to 13.7 euro. For a pack of cigarettes rise from 57.5% to 70%. Form these figures clearly shows that there is a dramatic increasing in taxes. This can be illustrating graphically. This is a graph on a tax on sellers.

The quantity for a pack of cigarettes per day is on the X- axis, and price of cigarettes is on the Y-axis. With no tax, the equilibrium price is at where the blue line intersects with demand curve. A tax on sellers is like an increase in cost, so it decreases in quantity supply. However, if we want to determine the new supply curve, we add the tax to the minimum price that sellers are willing to accept for each quantity sold. In which the supply curve is shifted leftward, where it became the red Supply + tax curve. This will established a new equilibrium price, where the red curve intersects with demand curve. This new equilibrium price is much greater than the original equilibrium price. The black arrow pointing upwards shows an increase in price, and the black arrow pointing leftward shows the decrease in quantity.

            

The tax revenue the government collects equals T*Q, the size of the tax T times the quantity sold Q. Thus, tax revenue equals the green area between the supply and demand curves. The government enacts taxes to raise revenue and that revenue earned must come from someone’s pocket. From revenue raising perspective, higher the tax rates would be justified if the demand for alcohol and cigarettes were relatively inelastic. For instance in this article it talks about country Greek, they are no substitutes for cigarettes and alcohol for smokers and alcohol drinkers, in this case alcohol and cigarettes are considered as necessities. Even though the price increases, the consumer still is buying the products, because they are no other goods which can be replaced with. Moreover, each country has own culture. In country Greek, drinking and smoking are part of their culture, everyone is doing them as their interests. So it’s a necessity for them. In comparison to country Malaysia, due to they have different races. Some of them cannot take alcohol, therefore its elastic for them. In Greek, since the demand of a cigarettes and alcohol are relatively inelastic, the deadweight loss of a tax is small. A tax has a deadweight loss because it induces buyers and sellers to change their behavior. The tax raises the price paid by buyers, so they consume less. At same time, the tax lowers the price received by sellers, so they produce less. This graph will show how the size of tax looks like.

According to The Finance Ministry said, the increase taxes on alcohol and cigarettes would deter consumption, ‘to the benefit of public health’. I strongly agree with is statement. When people smoke cigarettes, toxic ingredients such as carbon monoxide and nicotine will enter their body, it damages red blood cells, high risk of getting lungs cancer, as well as affect their immune system. For alcohol, it slows the function of brain; this might leads to car accidents. In additional, higher tax rate might cause crimes. When people cannot afford to purchase alcohol and cigarettes, they tend to do whatever in order to get more money. For instance, robbing a bank, stealing others valued goods, and drug trafficking.

As the taxes on drink are based on their alcohol concentration, therefore the tax on spirit is much more than beer and wine. People around the world recognize there are essential difference between high-strength spirit drinks like Everclear, Bacardi, than low-strength drinks like beer and wine. In order to create a high alcohol percentage spirit, an additional process is needed, which is distillation. This process requires lots energy and equipments to do so as well as lots supply of raw materials. The costs of production will be increased automatically. Also for the costs for the packages and the design of the bottles are also the elements that affect the price. Most high-strength spirits are selling in the pubs, which mean there is a higher opportunity for high-classed people to consume more, therefore the government would make more money out of them.  In order for Greek’s government make more profit, a higher tax for spirit is much effective than higher the tax on beer and wine.

When a tax drives a wedge between the buying price and the selling price, this will be result an inefficient underproduction. A tax makes the marginal social benefit exceed marginal social cost, it shrinks the producer’s surplus and consumer’s surplus, and therefore it generates a deadweight loss. This graph shows that the inefficiency of a tax on cigarettes. The demand curve shows the marginal social benefit. As well as the supply curve shows the marginal social cost. Without a tax, the market produces the efficient quantity. With a tax, the supply curve has shifted leftward, which will produce an inefficient quantity.

Is people paying taxes is fair? Well, it depends. For these people who are willing to pay tax, at the same time they will receive the service provided by government. Then this arrangement is fair because it means these who benefit most pay the most taxes. This is actually applied to The Benefit Principle. For these who can afford high taxes are mostly rich people, therefore the rich people might have benefited more. On the other hand, people can also pay the tax according to their ability. It is obvious that a rich person would have more ability than a poor person. A higher rate of tax increases along with people’s income.