Tax Talk: It makes tax sense to hit smokers hard

There is an old lady sitting on a bench outside the retirement home holding an unlit half-smoked cigarette.

"Please give me a light," she asks. I oblige. "They don't make cigarettes like they used to," she moans. "They go dead all the time and I have to ask the nursing sister for another light."

I didn't stop to explain to her that RIP on cigarette packs stands for reduced ignition propensity, a new invention that kills a cigarette unless the smoker keeps sucking. This is specifically designed to protect Bambi from bushfires and stop those who smoke in bed from incinerating themselves.

Finance Minister Pravin Gordhan must be a huge fan of RIP. Smokers will have paid R12-billion in sin tax during the 2012/13 fiscal year. At R10.32 sin tax per pack, that makes for about 1.25 billion packets a year - or 23 billion cigarettes at 52c sin tax per cigarette.

The inevitable sin tax increase to be announced in the national budget speech on February 27 will probably take the sin tax component to R11 a pack or 55c a cigarette.

With RIP, smokers have the wretched choice of relighting a dead cigarette or starting afresh. Many say they are smoking 10% more because of RIP.

If, with RIP, 23 billion cigarettes suddenly becomes 25 billion, at a higher sin tax rate collections could suddenly jump from R12-billion to R14-billion.

This is all before VAT collections - 25 billion cigarettes at R33 per pack translates into about R5-billion in VAT. All in, tobacco will contribute about R20-billion in taxes during 2013/14.

Now, there is much talk that the budget speech will contain an increase in the maximum marginal rate of tax for individuals from 40% (on income above R617000 a year) to 42%.

And perhaps the capital gains tax inclusion rate will be raised from 33.3% to 50%. But, by my rough calculations, this would increase tax collections by only between R3-billion and R5-billion.

The conclusion is that the wealthy can only earn, spend, drink and smoke so much. A successful tax collection needs the widest possible tax base.

If the average cigarette consumption is a pack a day, then 23 billion cigarettes are consumed by about three million smokers. It is far easier to target them for a tax increase than the 400000 or so taxpayers who earn more than R400000 a year.

• Lester is a professor at the Rhodes Business School, Grahamstown