In 2011-2012 there are approximately 3 million (15% of the 20 million Australian adults)i adult smokers in Australia that spent approximately $13.5 billion1 per year on tobacco. The federal and state governments raised approximately $7.5 billion from tobacco excise taxes and $1.23 billion on the GST from tobacco in 2011-12.

In total in 2011-12 the GST raised $48b., personal income tax raised $138.5b., Tobacco Excise $7.5b Fuel Excise $16b., company tax raised $65b., trade fees and other federal taxes raised $10b., state taxes $58b., and local property taxes raised $12b.

The total excise tax rate on tobacco is %157 and then the GST is applied at 10% the final after tax price is p = $1 x (1+t) x (1+gst) = $1 x 2.57 x 1.1 = 2.827

The elasticity of the number of smokers with respect to the price is -0.25 and the elasticity of the tobacco expenditure (including all taxes) per smoker with respect to the price is -0.25

Consider the effect of raising the excise rate from 157% to 200%.

a) What would be the new after tax price (including GST) of tobacco is?

b) How many smokers would give up?

c) How much would the remaining smokers spend on average per year?

d) How much in total would be spent on tobacco in Australia per year?

e) How much GST and excise tax per year would be raised from tobacco by the government? By how much does the policy change government revenue per year?