Reform of the Tobacco Consumption Tax and the Introduction of Inflation Indexation System
Asian Tax Journal Vol. 13 No. 1 (2012), pp. 423-452
Abstract
Most advanced countries have been steadily increasing tobacco price by taxation to reduce smoking since long decades ago so the smoking prevalence rate of them is noting more than half that of Korea. Nonetheless, in Korea, there are still hot debates about the effectiveness of tobacco price policy. And the tobacco consumption tax in Korea has an important role in local governments as a main source of local tax revenue. Tobacco related excise duties is regarded as Pigouvian taxes in economic sense which endogenize negative externalities from consumption. To achieve socially desirable equilibria, the tax amounts should be equated with the marginal social cost of consuming the goods. Since the nominal values of social costs tend to increase along with inflation in general, the desired tax rates should also increase as much as price changes(or above inflation rates). A tax reform is necessary to restore its initial policy purposes to discourage tobacco consumption,to correct tobacco's externality and to ensure stable revenue source for local governments. This study examines 3 alternatives, ‘simple inflation indexation method(alternative 1)', ‘australia's method for inflation indexation(alternative 2)', ‘Myung Jae Sung(2008)'s method(alternative 3)'. Alternative 3 with correction device for external effect of them is found to comply with basic direction of this study. It is necessary for current smokers to increase current tobacco price to motivate to quit smoking. For this purpose, on the basis of this study and a recent survey results, current tobacco price should be increased to ￦3,900.
Keywords
- the tobacco consumption tax
- Pigouvian tax
- simple inflation indexation method
- australia's method for inflation indexation
- 'Myung Jae Sung(2008)'s method
- Alternative 3 with correction device for external effect
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