Why and how to tax cigarettes?

Abstract

Objective of the article is to identify the functions and requirements an excise tax on cigarettes should fulfil, next also to calculate a model for the taxation of cigarettes in the Czech Republic with practical relevance, and to formulate recommendations for cigarette tax policy. Determining the role which should be fulfilled by cigarette excise taxes necessarily requires knowledge of the costs of cigarette consumption, which may be used to calculate the specific tax burden on cigarettes for the particular case of the Czech Republic and to formulate general conclusions and recommendations for cigarette tax policy. Cigarette excise taxes must primarily fulfil a remedial function. Other functions and requirements which may also be fulfilled by the tax are also naturally important but they should be accorded second place. Cigarette excise taxes should reclaim societal costs for the consumption of cigarettes, primarily including healthcare costs, as well as other costs connected to the consumption of cigarettes, by utilizing a specific tax which appears most suitable to the purpose at hand. Relevant studies show taxation of cigarettes in the Czech Republic is inadequate, falling short of covering costs for the consumption of cigarettes identified in the studies, by 13% according to one study, 22% according to another, and up to 58% according to a third study. Cigarettes should be burdened by a specific tax corresponding to the costs of their consumption. Calculations show that cigarette taxes must be increased in the Czech Republic by a significant amount. This will require close cooperation with public institutions, particularly those focusing on healthcare and finance. The generally accepted results of cost calculations and the cigarette taxation rates they entail must be enforced in practice and enshrined in the European Union context in an appropriate directive as well as in national laws.