Impact of tobacco tax reforms on tobacco prices and tobacco use in Australia

OBJECTIVE: To document the impact of changes to tobacco taxes on the range and price of tobacco sold during the period when the National Tobacco Campaign (NTC) was run.

DATA SOURCES: Information about brand availability, pack size, and price was extracted from Australian Retail Tobacconist. A retail observational survey was undertaken to monitor actual retail prices. Data on cigarette prices, brands, packet configurations, and outlets from which they were purchased were obtained from the benchmark and three follow up population telephone surveys conducted to evaluate the NTC.

METHOD: Data from the three sources were compared to see the extent to which the impact of tax changes had been offset by greater retail discounting and a more concerted effort by consumers to purchase cheaper products.

RESULTS: Smokers were unable to cushion themselves from the sharp price increases that occurred during the third phase of the NTC. Both average recommended retail prices of manufactured cigarettes and average actual cigarette prices paid by smokers increased by 25% in real prices.

CONCLUSION: The fall in smoking prevalence over the first two phases of the NTC was substantially greater than would be expected due to tax changes alone. The fall in smoking consumption over the first two phases was slightly less than would be expected and in the third considerably higher than would be expected.

Preventing tobacco use and harm: what is evidence based policy?

The majority of tobacco users commence in early to mid-adolescence. Tobacco smoking can be characterised as a chronic, relapsing disorder. While risk increases with amount smoked, there is no safe level of use (i.e., all use is risky). Duration of use is the most important predictor of premature death with the majority of excess morbidity and mortality avoidable if people quit before middle age. Investment in initiatives that reduce smoking among pregnant women and those at risk of cardiovascular disease provide quickest returns -in reduced health care episodes and expenditure.  Measures that successfully reduce smoking among parents probably reduce smoking uptake by children, and high levels of smoking among both children and parents appear to be associated with higher levels of illicit drug use.
The evidence base for pharmcotherapies in the treatment of tobacco dependence is very strong. Population-level initiatives such as tax increases, mass media-led campaigns and smoke-free policies are all highly cost-effective in reducing population-smoking levels, including among children and young people.
Australian tobacco control initiatives have been based on "social ecology" conceptualisations of the problem, which acknowledge the pivotal role of the media in shaping social values, and public and political opinion.
Broad social change, as well as more focused prevention and cessation initiatives, has drawn heavily on research findings from the behavioural sciences. Considerable effort (mainly, in Australian, in the NGO sector) has gone into documenting policy inputs and monitoring impact and outcome measures.
This chapter discusses why conceptualising tobacco-related harm from legal, economic and social policy perspectives should also help build support for tobacco control policy among academic and practising economists and lawyers, and in the business, welfare and government sectors.

The tax treatment of employee stock options : generous to a fault

In the 2000 budgets, both the federal and Ontario governments introduced changes to the tax treatment of employee stock options for the explicit purpose of making their tax treatment in Canada similar to or more favourable than that in the United States. The federal budget added a deferral, similar to that currently applicable to options granted by Canadian-controlled private corporations, for up to $100,000 per year of public company stock options. The Ontario budget introduced an exemption from tax for employees involved in research and development on the first $100,000 per year of employee benefits arising on the exercise of qualified stock options or on eligible capital gains arising from the sale of shares acquired by the exercise of eligible stock options. These proposals reflect the apparent acceptance by the two governments that there is a “brain drain” from Canada to the United States of knowledge workers in the “new” economy and that reductions in Canadian taxes should stem this drain. In the author’s view, the tax treatment of employee stock options, even without these changes, is overly generous. Both the federal and provincial proposals ignore the fact that most employee stock options are taxed more favourably in Canada than in the United States in any event. In particular, most employee stock option benefits in Canada are taxed at capital gains tax rates, whereas in the United States most are taxed at full rates. While the US Internal Revenue Code does provide capital gains tax treatment for certain employee stock option benefits, a number of preconditions must be met. Most important, the shares acquired pursuant to the options must be held for a minimum of one year after the option is exercised. In addition, there are monetary limits on the amount of options that qualify for capital gains treatment. In Canada, there are generally no holding period requirements or monetary limits that apply in order for the option holder to benefit from capital gains tax rates. Empirical evidence indicates that the vast majority of employees in the United States exercise their options and immediately sell the shares acquired. These “cashless exercises” do not benefit from capital gains treatment in the United States, whereas similar cashless exercises in Canada generally do. This empirical evidence suggests not only that the 2000 budget proposals are unwarranted, but also that the existing treatment of employee stock options in Canada is already more generous than that in the United States. This article begins with a theoretical “benchmark” for the taxation of employee stock options. The author suggests that employee stock options should be treated in the same manner as other income from employment. In theory, the value of the benefit should be included in income when the option is granted or vests. However, owing to the practical difficulty of valuing employee stock options, the theoretical benchmark proposed is that the value of the benefit (the difference between the fair market value of the shares acquired and the strike price under the option) be taxed when the shares are acquired, and the employer be entitled to a corresponding deduction. The employee stock option rules in Canada and the United States are then compared and contrasted with each other and the benchmark treatment. The article then examines the arguments that have been made for favourable treatment of employee stock options. Included in this critique is a review of the recent empirical work on the Canadian brain drain. Empirical studies suggest that the brain drain—if it exists at all—is small and that, despite what many newspapers and right-wing think-tanks would have us believe, lower taxes in the United States are not the cause. One study, concluding that taxes do have an effect on migration, suggests that even if Canada adopted a tax system identical to that in the United States, the brain drain would be reduced by a mere 10 percent. Indeed, even if Canada eliminated income tax altogether, it would not stop the brain drain. If governments here want to spend money in order to stem the brain drain, they should focus on other areas. For example, Canada produces fewer university graduates in the fields of mathematics, sciences, and engineering than any other G7 country except Italy. The short supply of university graduates in these fields, the apparent loss of top-calibre academics to US
universities, and the consequent lower levels of university research in these areas (an important spawning ground for new ideas in the “new” knowledge-based economy) suggest that Canada may be better served by devoting more resources to its university institutions, particularly in post-graduate programs, rather than continuing the current trend of budget cuts that universities have endured and may further endure if taxes are reduced.
As far as employee stock options are concerned, if Canada does want to look to the United States for guidance on tax reform (which it seems to do with increasing frequency of late), it should adopt the US rules applicable to nonstatutory options, which are close to the proposed benchmark treatment. In the absence of preferential tax treatment, employee stock options would still be included in compensation packages provided that there were sound business reasons for their use. No persuasive evidence has been put forward that the use of stock options, in the absence of tax incentives, is suboptimal. Indeed, the US experience suggests quite the opposite.

Moving personal tax online: the Australian Taxation Office's E-Tax initiative

In exploiting the capabilities of online technologies, governments have developed policies and launched projects to conduct transactions and deliver their services through the Internet. The motivations for this include cost cutting, efficiency improvements, service enhancements, and leadership in business transformation. However, these diverse goals are not necessarily consistent, especially in the early stages of implementation. The e-government initiative discussed in this case study (E-Tax) provided an additional service to individual Australian taxpayers by enabling them to file their tax returns online. This case study provides an analysis of the E-Tax implementation in the first three years of its operation. Data on E-Tax use compared to other filing methods show that the package worked well technically, was favorably received by users, and was consistent with policy on e-government. However, adoption levels in the early stages did not meet government targets. The analysis suggests that impediments to a greater level of E-Tax use included entrenched patterns of filing, the nature of the taxation system, and political sensitivities. The E-Tax case demonstrates how complex e-government projects can be and the need to take contextual factors into account in planning and evaluating e-government implementation.

The role of trust in nurturing compliance : a study of accused tax avoiders

Why an institution’s rules and regulations are obeyed or disobeyed is an important question for regulatory agencies. This paper discusses the findings of an empirical study that shows that the use of threat and legal coercion as a regulatory tool—in addition to being more expensive to implement — can sometimes be ineffective in gaining compliance. Using survey data collected from 2,292 taxpayers accused of tax avoidance, it will be demonstrated that variables such as trust need to be considered when managing noncompliance. If regulators are seen to be acting fairly, people will trust the motives of that authority, and will defer to their decisions voluntarily. This paper therefore argues that to shape desired behavior, regulators will need to move beyond motivation linked purely to deterrence. Strategies directed at reducing levels of distrust between the two sides may prove particularly effective in gaining voluntary compliance with an organization’s rules and regulations.

Regulating more effectively : the relationship between procedural justice, legitimacy and tax non-compliance

In recent years, a significant number of middle-income taxpayers have been making use of aggressive tax planning strategies to reduce tax. In many cases, it is unclear whether these are designed and used by tax- payers to minimize tax legally or to avoid tax illegally. Those that are designed to exploit loopholes in tax law need to be dealt with in a way that restores faith and equity to the system. But how can tax authorities best manage taxpayers who may have inadvertently become involved in such illegal tax planning practices? Using longitudinal survey data, it will be shown that attempts to coerce and threaten taxpayers into compliance can undermine the legitimacy of the Tax Office's authority, which in turn can affect taxpayers' subsequent compliance behaviour. Responsive regulation, which is based on principles of procedural justice, will be discussed as an alternative enforcement strategy.

'Traffic-light' nutrition labelling and 'junk-food' tax : a modelled comparison of cost-effectiveness for obesity prevention

Introduction: Cost-effectiveness analyses are important tools in efforts to prioritise interventions for obesity prevention.
Modelling facilitates evaluation of multiple scenarios with varying assumptions. This study compares the cost-effectiveness of
conservative scenarios for two commonly proposed policy-based interventions: front-of-pack ‘traffic-light’ nutrition labelling
(traffic-light labelling) and a tax on unhealthy foods (‘junk-food’ tax).
Methods: For traffic-light labelling, estimates of changes in energy intake were based on an assumed 10% shift in consumption
towards healthier options in four food categories (breakfast cereals, pastries, sausages and preprepared meals) in 10% of adults. For the ‘junk-food’ tax, price elasticities were used to estimate a change in energy intake in response to a 10% price increase in seven food categories (including soft drinks, confectionery and snack foods). Changes in population weight and body mass index by sex were then estimated based on these changes in population energy intake, along with subsequent impacts on disability-adjusted life years (DALYs). Associated resource use was measured and costed using pathway analysis, based on a health sector perspective (with some industry costs included). Costs and health outcomes were discounted at 3%. The cost-effectiveness of each intervention was modelled for the 2003 Australian adult population.
Results: Both interventions resulted in reduced mean weight (traffic-light labelling: 1.3 kg (95% uncertainty interval (UI): 1.2;
1.4); ‘junk-food’ tax: 1.6 kg (95% UI: 1.5; 1.7)); and DALYs averted (traffic-light labelling: 45 100 (95% UI: 37 700; 60 100);
‘junk-food’ tax: 559 000 (95% UI: 459 500; 676 000)). Cost outlays were AUD81 million (95% UI: 44.7; 108.0) for traffic-light
labelling and AUD18 million (95% UI: 14.4; 21.6) for ‘junk-food’ tax. Cost-effectiveness analysis showed both interventions were
‘dominant’ (effective and cost-saving).
Conclusion: Policy-based population-wide interventions such as traffic-light nutrition labelling and taxes on unhealthy foods are
likely to offer excellent ‘value for money’ as obesity prevention measures.

From tax expenditures to rebates: an 'output based equity' approach for Australia's retirement policies

Australia's retirement policies are geared to shifting reliance from the Age Pension to private superannuation, predominately via the use of tax expenditures. This article examines tax expenditures in this area and concludes that inequities and inefficiencies abound. Reform is required. It is argued that the functions of revenue collection and social support should be separated, and the use of tax expenditures in superannuation should be discarded. A rebate system1 or a spending initiative, is proposed. This 'output based equity' approach will address fairness and equity issues at the time of retirement - when full benefits are received.

Changes in use of types of tobacco products by pack sizes and price segments, prices paid and consumption following the introduction of plain packaging in Australia

Objectives: To describe changes among smokers in use of various types of tobacco products, reported prices paid and cigarette consumption following the standardisation of tobacco packaging in Australia.
Methods: National cross-sectional telephone surveys of adult smokers were conducted from April 2012 (6 months before transition to plain packaging (PP) to March 2014 (15 months afterwards). Multivariable logistics regression assessed changes in products, brands and pack types/sizes; multivariable linear regression examined changes in inflation-adjusted prices paid and reported cigarette consumption between the pre-PP and three subsequent periods – the transition phase, PP year 1 and PP post-tax (post a 12.5% tax increase in December 2013).
Results: The proposition of current smokers using roll-your-own (RYO) products fluctuated over the study period. Proportions using value brands of factory-made (FM) cigarettes increased from pre-PP (21.4%) to PP year 1 (25.5%; p=0.002) and PP post-tax (27.8%; p<0.001). Inflation-adjusted prices paid increased in the PP year 1 and PP post-tax phases; the largest increases were among premium FM brands, the smallest among value brands. Consumption did not change in PP year 1 among daily, regular or current smokers declined significantly in PP post-tax (mean=14.0, SE=0.33) compared to PP year 1 (mean=14.8, SE=0.17; p=0.037).
Conclusions: Introduction of PP was associated with an increase in use of value brands, likely due to increased numbers available and smaller increases in prices for value relative to premium brands. Reported consumption declined following the December 2013 tax increase.

101 Ways to save money on your tax - legally! 2013 - 2014

Whether you use a few tips or all 101, you can feel comfortable knowing that just one tip alone will be more than enough to pay for the tax-deductible investment you make in this book.