It is sometimes argued that by raising taxes and depressing consumption, governments will lose taxation revenue. Do tax increases kill the goose that lays the golden egg? The answer is no, at least not immediately, for a number of reasons.
As discussed in Section 7.5 above, because of the relative inelasticity of demand for tobacco, overall consumption only drops at around half the rate of price increases. This results in increased government revenue from raised tobacco taxes.
However real price increases sustained over time are likely to impact significantly upon smoking rates and hence on revenue collections in the long term; and governments embarking on a program of tax increases as a component of a health policy should anticipate this decline and welcome it as evidence of a successful policy. However, as already noted, the declines are gradual, thereby allowing ample time to plan alternative sources of taxation revenue (an area in which governments are usually quite able). It is generally accepted that if people do not consume tobacco they will demand other goods, and presumably pay taxes on them.(71)