A Case For Higher Taxes on Addictive Goods

Fumio Ohtake (Professor, Osaka University)

Smokers are more likely to be addictive to gambling and drinking than non-smokers. This is a result of the questionnaire survey that was recently conducted by Osaka University Professor Shinsuke Ikeda and his research team (see the References below). They have also found that in their sample, smokers are less happy than non-smokers on the average, and the degree of their unhappiness, compared to non-smokers, is roughly equivalent to a decrease in yearly income by 2 million yen (about US$20,000). In addition, smokers and gamblers are more likely to be in debt (not including home loans) than those who do not smoke or gamble.

There is obvious commonality among smoking, gambling and drinking, all of which are addictive. That is, even if you wish to quite, you cannot. This kind of goods are called "addictive goods," whose main characteristic is such that the more you have consumed in the past, the more satisfaction you will obtain from consuming it now. Thus, it would be quite difficult to quite, once you start smoking or gambling for any reason.

Especially, those who tend to postpone their decisions will face more difficulties in quitting addictive goods. Actually, in the questionnaire survey mentioned above, those adults who said that as school pupils they used to do their summer homework toward the end of the summer recess are more likely to be addictive to smoking and gambling as well as falling into debt than those who used to do their homework earlier in the summer. The worst thing about addiction is that you cannot escape from the vicious circle of consuming addictive goods, even though you know you will become unhappy.

There are two ways of preventing addiction. One is to increase the prices of addictive goods by taxing them. Another way is to prohibit the sale of such goods altogether. An advantage of imposing taxes is to raise tax revenue, while discouraging the purchase of addictive goods. Prof. Shinsuke Ikeda referred to some research results in the U.S. and Canada, showing that sales taxes on cigarettes led to less smoking, a greater tax revenue, and a higher degree of happiness. In Japan, Professor Junmin Wan at Fukuoka University has shown that a 10% increase in the price of cigarettes tends to decrease smoking by 6.56% (see the References). In a comprehensive report by the WHO, it is pointed out that raising cigarette prices is an effective way of preventing health hazard by smoking.

An advantage of prohibiting the sale of addictive goods is to eliminate opportunities to consumer such goods altogether. Baylor University Professor Earl Grinols and University of Georgia Professor David Mustard have shown in their article (see the References) that the rate of crime attributable to casinos tends to increase over time in casino regions. In other words, restricting casinos would reduce crime, at least the kind of crime attributable to casinos.

Needless to say, it could be costly to enforce and monitor regulations. In Japan, however, it should not be too difficult to regulate pachinko parlors near train stations and their TV commercials. A higher tax might be imposed on them at the same time. Actually, pachinko parlors have recently been banned in Korea and Taiwan. We should seriously consider more regulations and/or higher taxes on smoking and gambling so that everyone may become happier as a result.

References:
Shinsuke Ikeda "Tabako Chudoku no Mekanizumu o Toku"; Chapter 2 in Fumio Otake ed. Konnani Tsukaeru Keizaigaku (Chikuma Shinsho, 2008) http://www.chikumashobo.co.jp/product/9784480064004/
Junmin Wan "Cigarette Tax Revenues and Tobacco Control in Japan" (Applied Economics, Vol. 38, pp. 1663-1675, August 2006) http://www2.econ.osaka-u.ac.jp/coe/dp/dp_no.19rev.pdf
Earl Grinols and David Mustard "Casinos, Crime, and Community Costs" http://ideas.repec.org/a/tpr/restat/v88y2006i1p28-45.html

(The original Japanese article appeared in the March 15, 2008 issue of Weekly Toyo Keizai)