Written by Carmelo Ferlito, CEO of Center for Market Education and Adam Hoffer, Associate Professor of Economics at University of Wisconsin

First published in Free Malaysia Today on 22 November 2021

The current debate on tobacco harm reduction in Malaysia is unbalanced, with far too great an emphasis on taxation and the state’s role in dictating the health of its citizens.

In a paper published recently by the Property Rights Alliance (International Best Practices for Tobacco and Nicotine Public Policy), which we co-authored with three Malaysian economists (Benedict Weerasena, Abel B Lim and Fariq Sazuki), we stressed how policymaking should instead be focused on respecting freedom and choice, while allowing innovation to thrive to produce better options for consumers.

The goal of public policy should be to improve the lives of its citizens, doing so by respecting their freedom of choice. Tobacco taxes are simply bad public policy. Tobacco taxes and other punishments decrease consumption at a gruellingly slow and ineffective rate.

Smoking is addictive and empirical evidence shows that smoking behaviour persists through even the harshest of punishment structures. Taxes and punishments are simply the wrong policies to apply if better public welfare and public health are the goals.

Because most smokers continue smoking through higher taxes, the result is that many poor households that smoke are made poorer. And higher tax-induced prices incentivise illicit activities that bring a myriad of negative consequences, including increased inequality and increased crime.

A better public policy is to provide rewards and support to smokers who want to quit smoking. Strong empirical evidence shows that smokers are more likely to quit smoking when they use nicotine replacement therapies (NRTs) such as nicotine gums and patches.

Smokers consume more NRTs when those products are financially subsidised. Similarly, eliminating or significantly reducing taxes on lower-risk nicotine alternatives, including e-cigarettes, vaping, and heated tobacco products, can make these nicotine alternatives affordable to smokers.

These smoking alternatives carry health risks, but the products remain far less dangerous than smoking – both to smokers and bystanders who are exposed to second-hand smoke. Any move that successfully encourages individuals to move from smoking tobacco to a less-dangerous alternative will be one that saves lives.

Instead of banning or taxing nicotine alternatives, a better public policy is to make them available under appropriate regulatory frameworks that would encourage smokers to move away from smoking tobacco to lower risk alternatives. And many of the smoking alternatives are still in their infancy when it comes to product development and delivery.

Human beings are remarkably innovative. When faced with a challenge and provided incentives to overcome such a challenge, human ingenuity knows few bounds. Millions of smokers asked for help to break their deadly habit. Innovators created and released dozens of nicotine replacement products – gums, lozenges, patches and more – to help those who wanted to quit.

Smokers expressed an interest in continuing to get their nicotine with a similar behavioural and sensory experience, but without many of the harmful products that accompany tobacco smoking. Innovators created and released e-cigarettes and heated tobacco products – to help those who wanted to continue with decreased risk to themselves and others.

We do not know what the next innovation will be. But we can offer policy guidance based on evidence from past innovations. For innovations to flourish, a proper institutional environment is key.

In her Bourgeois Trilogy, Deirdre McCloskey explained that liberty is the most important institutional arrangement that can allow innovation, growth, and human progress to happen. “What matters is human creativity liberated by liberalism,” McCloskey wrote.

Experimentation and innovation thrive where they are welcomed, encouraged, and incentivised. Barriers and costs hinder experimentation and innovation.

To encourage the next great innovation – one that will likely save millions of lives each year – public policy should focus on encouraging and incentivising experimentation, while removing as many barriers as possible from the work needed to create, develop, and sell new products.

To encourage innovation, governments need to implement a favourable tax regime whereby consumers receive both health and financial incentives when shifting their consumption habits from smoking to any other product.

Such policies include the elimination of VAT-like taxes and excise taxes on e-cigarettes, heated tobacco, and vaping products. Any decreased tax revenues could easily be offset by the reduced healthcare costs.

Furthermore, promoting innovation, by promoting growth, can accelerate the pace of wealth creation and therefore bring along additional fiscal revenues generated by the innovation’s positive spill-over effects.

We conclude with a three-principal policy framework related to harm reduction from tobacco:

  • Tobacco policy should use more rewards to incentivise behavioural change. Tobacco punishments and taxes should be minimised or avoided entirely;
  • Tobacco policy should focus entirely on decreasing tobacco smoking. Restrictions and taxes related to e-cigarettes, vaping and heated tobacco should be minimised; and
  • Tobacco policy should focus on creating an environment that incentivises innovation.