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Should tobacco profits be limited? Cigarette

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The UK government could raise at least £500m a year by capping the amount of profit tobacco companies can make from cigarettes, academics have said.

They are calling for state regulation similar to that used to limit the price of water. Writing in the journal Tobacco Control, they say reducing profits would allow for higher taxes without changing the price in shops. However, the industry said the ideas “fly in the face of common sense”. Dr Robert Branston, from the University of Bath, said the tobacco industry was “incredibly profitable”, with some companies making 67p in profit out of every £1 received after tobacco duties. He described that as an “incredible sum”. Some industries in the UK are already regulated to prevent companies taking advantage of a lack of competition in the market place. The regulator Ofwat reviews the price water companies can set and Dr Branston wants a similar organisation “Ofsmoke” to limit the profits made by tobacco manufacturers.

The report calculated the effect of limiting profits to levels achieved by food and drinks manufactures in Europe – between 12% and 20%.

Tax potential

Some popular cigarette brands are already taxed at nearly 90%, yet this report chooses to ignore this fact ”  Tobacco Manufacturers’ Association

Even accounting for the cost of setting up a regulator and a fall in corporation tax paid by the tobacco companies, the researchers estimated there was a large amount of extra tax to be made. “The results suggest that price caps could give the UK government scope to raise tobacco taxes by approximately £500m annually without affecting the price the consumer pays,” they wrote. The report said this was the equivalent of funding anti-tobacco smuggling measures across the UK and smoking cessation services in England twice over.  Dr Branston said: “How can you say it is a bad ideas then people are dying? I think there’s a lot going for this personally.”

The Tobacco Manufacturers’ Association said the industry was already high taxed and paid more than £12bn to the Exchequer in 2011-12. It said: “Some popular cigarette brands are already taxed at nearly 90%, yet this report chooses to ignore this fact and instead concentrate on the profit of a legitimate industry which supports over 70,000 UK jobs.

“The tobacco industry supports any regulation which is necessary, proportionate and evidence-based, but not proposals such as these, which fly in the face of common sense.”   Deborah Arnott, the chief executive of the charity Action on Smoking and Health, said, “Tobacco multinationals can continue to charge premium prices and make excess profits because their products are cheap to make, highly addictive and competition in such a highly regulated market is so limited.

“Capping their profits is not extreme, it’s essential.”

Researchers call for a price cap on cigarette profits

04 October 2010

An independent regulatory agency is needed to cap the excessive profits made by cigarette manufacturers, say researchers from the University of Bath.

Cigarette manufacturers currently make roughly double the profits of most other companies. The creation of an ‘Ofsmoke’ agency to regulate the industry would increase tax revenue and protect public health, according to the article published in the journal Tobacco Control. Professor Anna Gilmore, from the University’s Department for Health and the UK Centre for Tobacco Control Studies; Dr Robert Branston, from the School of Management; and Professor David Sweanor from the University of Ottawa’s Faculty of Law, say that capping the pre-tax cigarette manufacturers’ price would safeguard society from the market failure behind manufacturers’ pricing power and profits. Regulation would set a maximum price that cigarette companies could charge for their product, based on an assessment of genuine operational costs. Retail mark-up would not be affected, or the price that consumers pay, but the excess profit currently accrued by cigarette manufacturers would be transferred to the national treasury through increased tax. The system would be set up at no cost to the consumer or taxpayer, funded instead through a levy or licence fee paid by tobacco companies.

Dr Robert Branston, Deputy Director of the University’s Centre for Governance & Regulation, said: “A handful of companies dominate the market and cream off massive profits. With such a deadly product, competition isn’t attractive, so we’ve identified regulation as an alternative that stands to benefit both government and public health. “The market has failed to curb cigarette manufacturers in terms of pricing power and profit, and tobacco control policies have unintentionally exacerbated the problem. “Clamping down on the extreme profitability of cigarettes would reduce the incentive for tobacco companies to fight public health measures and mean they have fewer funds at their disposal. “A move to regulation would enable tobacco control policies to be expanded as companies would be partially insulated against impact on revenue and less able to argue against them.”

He went on to say that regulation would also be a way of preventing people from down-trading to cheaper products and restraining the behaviour of companies when it comes to cigarette smuggling and marketing to young people. “The tobacco industry is likely to argue that this type of direct economic regulation is an extreme reaction, but it’s hard to argue that nothing should be done given the extent of market power that these firms are enjoying and the number of deaths the sector causes,” said Dr Branston. The paper is based on the UK but researchers are confident that the system could be applied to most markets. They are planning further research to quantify the tax benefits of regulation and its effect on tobacco manufacturers.

Robert Branston

Download PDF : Gilmore_Case_for_OFSMOKE

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