Analysis of an Excise Duty: the Policy of Tobacco Taxes in Germany

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Daniel Ströbel - Analysis of an excise duty: The policy of tobacco taxes in Germany

Analysis of an excise duty
The policy of tobacco taxes in Germany

Master of Business Administration (MBA)

Module: Assignment: Course Instructor:

Economics 1/2 Dr.rer.pol. Markus Wilhelm

Author:

Daniel Ströbel

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Daniel Ströbel - Analysis of an excise duty: The policy of tobacco taxes in Germany

Executive Summary
Aim of this work is to analyse tobacco tax in Germany and find out under which circumstances it can be used as instrument to increase revenues from this excise tax for the state or to discourage smoking. The German market was analysed to find out that roughly 26% of the population are smokers, generating revenue of 13.37 billion Euros in the year 2009. Demand and supply are then used to explain the market and the influencing factors. Demand is mainly influenced by the increased income and the availability of substitutes, whereas supply’s main driving force is the increased prise due to taxation and substitutes as well. Consolidation of these numbers leads to the interesting discovery that demand elasticity for tobacco in Germany seems to be indeed highly elastic. Cigarettes smuggled in from Eastern Europe are the main substitute influence the market and it is assumed that every fifth cigarette smoked in Germany has not been duty-paid here. The tax burden is analysed and discovered that it will not be beard exclusively by suppliers or consumers, but the burden will be split, albeit it should be in favour of the customer in a market with high elasticity of demand. If the state wishes to increase revenues from tobacco tax, that usually requires an inelastic demand. Also, there is a threshold defined by the Laffer curve. If taxes are raised beyond the angular point of that curve, revenues decline instead of increase. For the purpose of discouraging smoking, however, an elastic market is beneficial as relatively more people quit smoking. One has to be aware though that this digress from tobacco may lead to an increased consumption of contraband cigarettes instead.

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Daniel Ströbel - Analysis of an excise duty: The policy of tobacco taxes in Germany

Contents
Executive Summary......................................................................................... I Contents ......................................................................................................... II List of tables .................................................................................................. III List of figures ................................................................................................. III 1 2 Introduction.............................................................................................IV Market situation analysis ........................................................................IV 2.1 2.2 Current situation ...............................................................................IV Demand and Supply .........................................................................VI Demand .....................................................................................VI Supply .......................................................................................VII Equilibrium price ......................................................................VIII Elasticity...................................................................................VIII Substitution ................................................................................IX Impact of tax increase ................................................................XI

2.2.1 2.2.2 2.2.3 2.2.4 2.2.5 2.2.6 3

State actions..........................................................................................XII 3.1 3.2 Methods for increasing tax revenue ................................................XII Methods to prevent smoking...
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