Post by Flo on Feb 16, 2007 11:33:51 GMT -5
I picked up this article from the MSN news site and thought it might be of interest:
By John Caspar
February 14, 2007
According to Statistics Canada, about twenty percent of Canadian adults smoke. That's a encouragingly low number in relative terms, but it is still an amazingly high representation in real number terms. The tobacco companies must be delighted with themselves. The habit is so entrenched in our society that one out of every handful of adults smokes.
This is a personal finance column, so I'm not going to wow you with the health statistics or stimulate you with the politics of yes-smoke versus no-smoke laws. What I'm going to do is share my thoughts on the economics of smoking.
I come by this insight honestly enough. I grew up in a household that contained one adult smoker of the two-pack-a-day variety. Subsequent to the adolescence of the children in our family, we grew to a full compliment of one two-pack-a-day plus three one-pack-a-day habits. I'm just now getting it out of my clothes.
Let's set the direct costs of smoking aside for a moment, and look at the hidden costs. The first hidden overhead costs are hygiene expenses. The favorite rooms in your house will require painting more frequently if you are a smoker, so you've got painting costs. Your carpets will have to be vacuumed and shampooed more frequently, so you've got electrical, accelerated vacuum depreciation, and carpet cleaning costs. Then there's miscellaneous breath mints, air fresheners, and extra car wash and interior shampoos. This all adds up to real money.
You've also got to pay higher life and disability insurance rates if you are a smoker. The actuaries who price insurance know that smokers are much more likely to die young than non-smokers, so they charge for the additional risk. Of course, an early checkout date may mean you pay fewer premiums overall. But they will be higher.
Then you have the social costs. No matter how much they talk about the power of your wretched addiction on Oprah or what they say to your face, non-smokers are pretty sure you're a wimp for not quitting. Especially ex-smokers, who know you are. And let's not even discuss the unsightly staining effects of nicotine.
Then there are the indirect costs that the whole of society must bear. Smokers have a higher motor vehicle accident rate than non-smokers, so non-smokers carry smokers on the backs of flat-rate car insurance. Health care costs are obviously higher for smokers than non-smokers, but we all pay a non-discriminatory rate for health insurance - a boon to those who make the choice to continue smoking.
The economic costs of smoking are high before we even begin to tally the direct out of pocket costs. But let's do that tallying now. An old buddy of mine - I'll call him Barney - smokes one-and-a-half to two packs of cigarettes a day, by his own admission. Barney doesn't buy his cigarettes by the carton, since he is concerned that he'd smoke more if he had two hundred cigarettes open in front of him all at once. He figures that the fact that each pack of cigarettes is a discrete sale might mitigate his consumption. I think he's just in denial, and he just doesn't think of himself as a heavy, buy-‘em-by-the-carton kinda guy.
Barney has to pay about $12 per day in order to consume one-and-a-half packs of cigarettes. That's $4,380 per year. Now, here's the kicker. Barney makes about $60,000 per year, which means that he's in the 31 percent tax bracket in B.C. That is, for every taxable dollar Barney earns above about $36,380, he has to send thirty-one cents off to the Canada Revenue Agency. That means that in order for Barney to have $4,380 to spend on smokes, he has to earn more than $6,300. This, you will notice, is more than ten percent of Barney's annual gross income! Barney has opted to allocate ten percent of his gross income on an activity that will indirectly consume still more financial resources, destroy his health, and make him generally smelly to be around.
Here is just a list of things that could be done with that money:
Barney could drive a much nicer car. Since he uses his vehicle largely for business and his car lease payments are therefore tax deductible, Barney could get a fancier set of wheels for the gross cost of the cigarettes he smokes. That's an extra $500 per month available for a higher car lease payment - a considerable upgrade.
Barney could make a big difference to others. Because of the tax credit that charitable donations generate, Barney could give $7,700 to charity (B.C. tax rates) for the same net cost as his deadly habit. Barney could support the Cancer Society, for instance, or feed a lot of children.
Barney could get in shape. The annual cost of a great gym membership is about $600. The cost of a week at an all-inclusive beachfront resort in Puerto Plata is about $1,500 right now. Barney could work out, get back in shape, spend $500 on casual wear and treat himself to a week of fun in the sun. That's still only a total of $2,600, so Barney could still give $3,000 to charity ($1,733 after-tax equivalent) and the total still won't equal the net amount he spends on cigarettes each year.
Barney could save. If Barney took the $4,380 after-tax cost of his smokes and put it in his RRSP, he'd reduce his taxes by $1,364. He could in turn pay off some debt with the tax savings. Or go to Puerto Plata.
Any of the above seem like a good value trade for the cigarettes. But I know Barney, and I know what he'll say. He'll say he likes the RRSP contribution idea, and with the $1,364 he gets back, he can buy 17 cartons of cigarettes. If he's careful and he cuts back, he'll say, maybe he can make them last for most of the year. I could argue that he should actually put the $1,364 into his RRSP as well, but I won't. The fact is that if he smokes all those cigarettes, he probably won't be retired for long anyway.
© 2007 John Caspar
John Caspar is a Vice President and Investment Advisor with CIBC Wood Gundy, a division of CIBC World Markets Inc., a subsidiary of Canadian Imperial Bank of Commerce and Member CIPF. The views of the author do not necessarily reflect those of CIBC World Markets Inc. Additional information is available. John is the money analyst for the CTV News in Vancouver. His web page is www.johncaspar.com
By John Caspar
February 14, 2007
According to Statistics Canada, about twenty percent of Canadian adults smoke. That's a encouragingly low number in relative terms, but it is still an amazingly high representation in real number terms. The tobacco companies must be delighted with themselves. The habit is so entrenched in our society that one out of every handful of adults smokes.
This is a personal finance column, so I'm not going to wow you with the health statistics or stimulate you with the politics of yes-smoke versus no-smoke laws. What I'm going to do is share my thoughts on the economics of smoking.
I come by this insight honestly enough. I grew up in a household that contained one adult smoker of the two-pack-a-day variety. Subsequent to the adolescence of the children in our family, we grew to a full compliment of one two-pack-a-day plus three one-pack-a-day habits. I'm just now getting it out of my clothes.
Let's set the direct costs of smoking aside for a moment, and look at the hidden costs. The first hidden overhead costs are hygiene expenses. The favorite rooms in your house will require painting more frequently if you are a smoker, so you've got painting costs. Your carpets will have to be vacuumed and shampooed more frequently, so you've got electrical, accelerated vacuum depreciation, and carpet cleaning costs. Then there's miscellaneous breath mints, air fresheners, and extra car wash and interior shampoos. This all adds up to real money.
You've also got to pay higher life and disability insurance rates if you are a smoker. The actuaries who price insurance know that smokers are much more likely to die young than non-smokers, so they charge for the additional risk. Of course, an early checkout date may mean you pay fewer premiums overall. But they will be higher.
Then you have the social costs. No matter how much they talk about the power of your wretched addiction on Oprah or what they say to your face, non-smokers are pretty sure you're a wimp for not quitting. Especially ex-smokers, who know you are. And let's not even discuss the unsightly staining effects of nicotine.
Then there are the indirect costs that the whole of society must bear. Smokers have a higher motor vehicle accident rate than non-smokers, so non-smokers carry smokers on the backs of flat-rate car insurance. Health care costs are obviously higher for smokers than non-smokers, but we all pay a non-discriminatory rate for health insurance - a boon to those who make the choice to continue smoking.
The economic costs of smoking are high before we even begin to tally the direct out of pocket costs. But let's do that tallying now. An old buddy of mine - I'll call him Barney - smokes one-and-a-half to two packs of cigarettes a day, by his own admission. Barney doesn't buy his cigarettes by the carton, since he is concerned that he'd smoke more if he had two hundred cigarettes open in front of him all at once. He figures that the fact that each pack of cigarettes is a discrete sale might mitigate his consumption. I think he's just in denial, and he just doesn't think of himself as a heavy, buy-‘em-by-the-carton kinda guy.
Barney has to pay about $12 per day in order to consume one-and-a-half packs of cigarettes. That's $4,380 per year. Now, here's the kicker. Barney makes about $60,000 per year, which means that he's in the 31 percent tax bracket in B.C. That is, for every taxable dollar Barney earns above about $36,380, he has to send thirty-one cents off to the Canada Revenue Agency. That means that in order for Barney to have $4,380 to spend on smokes, he has to earn more than $6,300. This, you will notice, is more than ten percent of Barney's annual gross income! Barney has opted to allocate ten percent of his gross income on an activity that will indirectly consume still more financial resources, destroy his health, and make him generally smelly to be around.
Here is just a list of things that could be done with that money:
Barney could drive a much nicer car. Since he uses his vehicle largely for business and his car lease payments are therefore tax deductible, Barney could get a fancier set of wheels for the gross cost of the cigarettes he smokes. That's an extra $500 per month available for a higher car lease payment - a considerable upgrade.
Barney could make a big difference to others. Because of the tax credit that charitable donations generate, Barney could give $7,700 to charity (B.C. tax rates) for the same net cost as his deadly habit. Barney could support the Cancer Society, for instance, or feed a lot of children.
Barney could get in shape. The annual cost of a great gym membership is about $600. The cost of a week at an all-inclusive beachfront resort in Puerto Plata is about $1,500 right now. Barney could work out, get back in shape, spend $500 on casual wear and treat himself to a week of fun in the sun. That's still only a total of $2,600, so Barney could still give $3,000 to charity ($1,733 after-tax equivalent) and the total still won't equal the net amount he spends on cigarettes each year.
Barney could save. If Barney took the $4,380 after-tax cost of his smokes and put it in his RRSP, he'd reduce his taxes by $1,364. He could in turn pay off some debt with the tax savings. Or go to Puerto Plata.
Any of the above seem like a good value trade for the cigarettes. But I know Barney, and I know what he'll say. He'll say he likes the RRSP contribution idea, and with the $1,364 he gets back, he can buy 17 cartons of cigarettes. If he's careful and he cuts back, he'll say, maybe he can make them last for most of the year. I could argue that he should actually put the $1,364 into his RRSP as well, but I won't. The fact is that if he smokes all those cigarettes, he probably won't be retired for long anyway.
© 2007 John Caspar
John Caspar is a Vice President and Investment Advisor with CIBC Wood Gundy, a division of CIBC World Markets Inc., a subsidiary of Canadian Imperial Bank of Commerce and Member CIPF. The views of the author do not necessarily reflect those of CIBC World Markets Inc. Additional information is available. John is the money analyst for the CTV News in Vancouver. His web page is www.johncaspar.com