Unit Excise Tax Case Study

Question 02 A unit excise tax on tobacco products makes economic sense, since it will not only increase government revenue but will also improve the health of South Africans 2.1 Introduction The use of tobacco products pose a danger to the humans’ life. Moreover, for the past 2,5 decades the use of tobacco has been increasing particularly among young males (Ohsfeldt et al 1998). As a result, various policies to control tobacco use, including unit excise tax regulation were introduced. Given, the demand and price theory it makes economic sense to impose tax on tobacco product to discourage consumption. This will benefit the government since taxes are a source of government revenue. In this essay, am going to analyse the unit excise tax,

Ability-to-pay principle is related to horizontal equity and vertical equity. Horizontal equity states that individuals with the same economic capacity pay the same amount of tax. While the latter, postulates that individuals with greater economic capacity pay more. Horizontal equity treat people of same economic capacity in a similar, while vertical equity requires that people with differing economic capacity be treated differently. (Hyman

Although taxes are important for government function, they also distort relative prices and create inefficiency in the market. A unit excise tax on cigarette which fall under the category of selective tax is one of the tax which is levied as a source of revenue for the government and also to discourage consumption of the cigarette. Moreover, it is argued in this essay that the excise tax levied on buyers does not affect only the buyer but also the seller's because of possibility of tax shifting. That is, who actually bears the tax burden (this refers to tax incidence) does not depend on who the tax is levied on, but it depends on the elasticity of demand and