Tax of the cigarette increase and will it affect the sales of the cigareete?

http://thestar.com.my/news/story.asp?file=/2012/10/21/nation/20121021213418&sec=nation

KUALA LUMPUR: British American Tobacco Malaysia (BAT Malaysia) has announced a 20sen increase on the prices of all its cigarette packs effective Monday.

In the article state that, They are informed by the Royal Malaysian Customs to increase the price of the cigarette to RM 10.20. There are six factors may can affect the changes of the supplier, example, resources price, technology, taxes and subsidies, prices of other goods, producer expectation and number of seller. Why the taxes and subsidies are can affect the changes of supply? This is because businesses treat most taxes as costs. As the tax of the service or product increases so does the production costs. Hence, subsidies are “taxes inverse”. If the government subsidizes the production of a good, it in effect reduces the production costs and increase supply.

Based on Royal Malaysians Customs demonstrated that in 22 October 2012, government will increase the cigarette tax from 26% to 58%. There are few examples of income taxes in Malaysia; personal income tax, payroll tax, corporate income tax and excise taxes. Households are the key elements in the income taxes as we calling income receiver. Hence, households are both of consumer and people (everyone), everyone seeking to stratify unlimited wants and needs. Households is categorized the income receiver by how it was earned and by how it was divided.

 When cigarette tax increase, it will reduce household income, as it takes more money out to spent and buy a box of cigarette but when cigarette tax decrease in the country, it will increase disposable income, because it make households earn more money and more willing to spent into it. Hence, if the cigarette price went up, the sales of the cigarette will not decrease because cigarette is some kind of a ‘drug’ addict. For those who are chain smokers, they will willing to buy cigarette for themselves and not care for the price so the tax won’t change the sales of the cigarette. But somehow Income taxes will affect supply and demand curve will shift to left and right. Tax on a good is added to the marginal cost of seller of the goods. A increase of the tax graph below can explain the shift supply and demand curve. $1 of tax on one product will change the supply curve due to the amount of tax. The shifts in the supply curve, the equilibrium of price and quantity will also change because of tax. Eventually the impact on quantity and price will depend on the price elasticity’s of demand and supply.

This graph shows the supply and demand curves for products. The examples of equilibrium price are 400 and 460 thousands console which the demand curves and the supply curve joint together but there is a 32% (RM0.20) tax on the supplier. This means that the supplier must pay RM0.20 to government for each product they had produce to the consumer. Therefore, there is a RM0.20 tax in each product that they need to produce; suppliers will be less willing to produce any product at every price they stated so there is not just a movement on the supply curve, it will shift to left side of the cure. It means the production of the product decrease due to the taxes that government apply it. For chain smokers, they would not care about the price and they are willing to afford to buy whether the price higher than old times is.

When the price of the product increased from $10 to $10.20 consumers are still able to purchase cigarette. At the previous equilibrium point, there were 460 products had been sell but at the higher price, there are only 400 products sold. So there are 60 fewer products sold. The products that are no longer sold are gains from trade no longer they made, or dead weight loss. This means the blue area on the graph. But for chain smokers, they are not able to afford to smoke for every day. It will cause them smoke less and won’t make them quite immediately.  For examples, for one chain smoker he everyday must have one pack of cigarette and it cost him RM10.20 for one days. When end of the month he had spent RM316.20 on cigarette box. 

Although the sales tax is a direct impact on the supply, it has only an indirect influence on consumer demand. In addition to the changes, which need to be considered demand equilibrium price, sales tax, but also affect the purchasing power of consumers. When the sales tax rate is high, consumers spent more money in taxes and spend less on additional goods. In a poor demand market, they will force the companies to reduce prices in order to maintain a stable demand.

The sales tax will cause the supply curve shift inward, it has a secondary effect in equilibrium price for a product. The equilibrium price matches the price of the manufacturer's supply and consumer demand in a stable price. Since sales taxes increase the price of goods, it leads to a decline in the equilibrium price. This may mean that it becomes more difficult for corporate profits, sales of goods and consumers to change their buying behaviour to purchase more expensive goods or luxury goods.

 

Lastly, Sales tax affect supply and demand, and the form of the impact depends on how companies merge their sales tax and the extent of its pricing structure. When a national government increased the sales tax, companies may choose to leave their prices and earn lesser per sales of the profits. Enterprises can also choose to pass the tax along to customers through higher prices, which can significant the supply and demand. Governments to examine these issues before the imposition of new taxes and the flexibility of the enterprise work, subtle changes in the price structure of total sales tax rate.