Specific tax

Tobacco

From 6.00 pm on 22nd April 2009, tobacco duty will increase by 2 per cent. The rates will be:

Product	Duty	Effect of tax* on typical item (increase in pence)	Typical unit
Cigarettes	24 per cent of the retail price plus £114.31 per thousand cigarettes	7p	packet of 20
Cigars	£173.13 per kilogram	3p	packet of 5
Hand-rolling tobacco	£124.45 per kilogram	7p	25g
Other smoking tobacco and chewing tobacco	£76.12 per kilogram	4p	25g of pipe tobacco

* Tax refers to duty, plus VAT

This increases tobacco duty in line with inflation.

Here's a diagram showing tobacco tax.

The problem is that the cigarettes in my local tobacconist went up by the 7p i.e. the full amount of tax. This means the price rose by ALL the tax.

Does this mean that the demand is perfectly inelastic?

I think not.

Try drawing the diagram with the price rising by 7p i.e. the full amount of tax.

Then consider beer.

From Thursday 23 April 2009, alcohol duty rates will increase by 2 per cent above the rate of inflation.

Alcohol duties will increase by 2 per cent above the rate of inflation in each of the next four years.

Product	Effect of tax* on typical item (increase in pence)	Typical unit
Beer (4.2% abv)	1p	pint of beer
Wine	4p	75cl bottle
Sparkling wine	5p	75cl bottle
Spirits (37.5% abv)	13p	70cl bottle
Spirits-based ready to drink	1p	275ml bottle
Cider and perry	1p	litre

* Tax refers to duty, plus VAT

Beer in my local went up by 1p - but demand is not perfectly inelastic.

So - what's happened?

Is the tax diagram rubbish?