13 October 2023

Smoking is a tax

Tobacco levies give the government £14bn-a-year, and are mostly paid by the people who can least afford them.

Inflation is a tax. Rishi Sunak was right to contradict Laura Kuenssberg on this point earlier this month, and BBC Verify is wrong to assert that it is not a tax, simply because it is not announced as a formal charge or levy in the Budget.

Economists such as Tony Yates, the former head of monetary policy strategy at the Bank of England, routinely describe inflation as a tax, because it is the result of the government (via the central bank, which it owns) adding money to the economy. Everyone who uses the economy (so, everyone) effectively transfers money to the government through inflation because the more prices rise, the more revenue goes back to the Exchequer. “If you come across a textbook that mentions monetary policy, I guarantee that it will use the term ‘inflation tax’,” Yates says. “It’s a debate people had probably 60 or 70 years ago and concluded, let’s call inflation a tax and move on.”

In these terms you could also argue that smoking – another thing that Sunak rightly wants to reduce, and eventually eliminate – is a tax. The cost of smoking is for most smokers not optional, because nicotine (combined with other substances and flavourings) is one of the most addictive substances known to science; it typically takes more than 30 attempts to quit. It’s debatable how much of a choice people have in becoming addicted to smoking, given that most smokers (an estimated 80 per cent) become addicted as children, and the conditions for becoming addicted are clearly imposed by a person’s surroundings (people living in the most deprived areas of England are four times as likely to smoke as those in the least deprived areas).

Smoking is a tax because almost all of the money from smoking goes to the government – which receives, for example, £11.04 if you buy a pack of 20 cigs for £14.10 (£8.22 Tobacco Duty plus £2.82 VAT). Tobacco duty alone nets the government more than £10bn a year, while the VAT on tobacco products (of which the UK bought £21.3bn last year) would add up to another £4.3bn.

It might look as if, given the lack of fiscal headroom for tax cuts, this is a useful £14bn to have; the energy profits levy was introduced in May last year was expected to raise that much over five years. It isn’t, though, and the reason for this is that the smoking tax is highly regressive: the fifth of the population with the lowest incomes do almost a third of the smoking, paying almost £5,000 a year for a 20-a-day habit.

That’s a problem for the economy, because the spending of people on low incomes is the best kind of spending for growth. An extra pound that goes to a person on low income is almost guaranteed to go straight back into the real economy (they’ll spend it on goods and services), whereas an extra pound to the wealthy is much more likely to go into the housing market, a savings account or a financial market. If you want growth, start by increasing the disposable incomes of those most disposed to spend.

Previous academic studies have suggested the huge benefit to the economy of this extra spending: in 1995 researchers at Manchester University predicted a severe reduction in smoking (from 1990 levels, which were high) could create 150,000 new jobs (this is known as “induced employment”). In the US, smoking bans have been shown to dramatically increase revenues at bars and restaurants. The tobacco industry, meanwhile, employs just 5,000 people in the UK.

There are, of course, other reasons to ban smoking (heart disease, chronic respiratory disease, lung cancer, dementia), all of which have their own impacts on the economy and an overstretched health system. Smoking costs the NHS £2.6bn a year.

The problem with the current debate around smoking (and vaping) bans is that people defend it as a liberty. It isn’t: the whole point of selling a highly addictive drug (backed up by vast sums in marketing and lobbying, not to mention all the free samples given to children) is to deprive the consumer of choice.

It is more realistic (and perhaps more politically excusable) to call smoking what it is – a £14bn-a-year tax, paid largely by the people who can least afford it.