Differential price responses for tobacco consumption: implications for tax incidence

Abstract

Increasing tobacco taxes is considered the most effective an cost-effective policy to reduce tobacco consumption. However, a common objection to tobacco taxes is that they tend to rely disproportionately on the poorest individuals since less affluent smokers incur proportionately greater expenditures on cigarettes compared with more affluent smokers. Such objections usually assume that all smokers throughout the income distribution react similarly to an increase in tobacco prices. But, if less affluent smokers are more sensitive to price changes (ie, they have a higher demand price elasticity), reductions in tobacco consumption should be higher at the bottom of the income distribution. This paper uses data from Argentina’s Household Expenditure Survey to estimate demand price elasticities for tobacco by income and age groups. Results indicate that less affluent smokers present higher demand price elasticities for cigarettes than more affluent ones. A 10% increase in cigarette prices would decrease consumption by 8.5% (4.4%) for the poorest (richest) smokers. In addition, young people are the most elastic group. These differential elasticities have relevant implications in terms of the distributional incidence of increasing tobacco taxes. As less well-off individuals reduce consumption relatively more, they bear a relatively lower tax burden. Thus, tobacco tax increases may not be regressive as is often believed. As a whole, this paper provides policymakers with relevant arguments for policy discussion and the public debate on common objections to increasing tobacco taxes.

How much to pay for a track and trace system: a simulation model for South Africa

“…The price elasticities are in line with estimates for South Africa and other low-income and middle-income countries 19 20. It has been shown that smokers of cheaper brands are more sensitive to price increases than smokers of more expensive brands 21. For this reason, we assume larger (absolute) price elasticities for the cheaper segments than for more expensive segments.…”

“…19 20 It has been shown that smokers of cheaper brands are more sensitive to price increases than smokers of more expensive brands. 21 For this reason, we assume larger (absolute) price elasticities for the cheaper segments than for more expensive segments. In addition, evidence suggests that some smokers switch to cheaper brands when their brand becomes more expensive.…”

On the impacts of higher tobacco taxes in Argentina: a computable general equilibrium approach

“…Based on Cicowiez, Sadoulet and de Janvry, Dimaranan and Muhammad et al, we define this value as follows: the value-added elasticities of substitution are in the range of 0.20-0.95, the Armington and Constant-Elasticity-of-Transformation (CET) elasticities are both in the range of 0.9-2.0 and the own price elasticities for household consumption demand are in the range of 0.4-1.0. [16][17][18][19] Most importantly, we calibrate GEM-Core Argentina under the assumption that the own price elasticity of tobacco product consumption is 0.6, as reported in Cruces et al 6 Table 1 describes the sectoral structure of Argentina's economy, for 2018, in terms of the distribution of value added, employment, exports and imports. It can be observed that tobacco-related activities (growing or primary production and manufacturing of tobacco products) represent a small share of the Argentine economy.…”

“…4 Along these lines, Argentina had increased the overall tax burden on tobacco products (ie, cigarettes) from 69% in 2014 to 76% in 2018. 5 Second, the first objection on the eventual regressivity of raising tobacco taxes has recently been questioned by Cruces et al 6 We build a computable general equilibrium (CGE) model of the Argentine economy focused on the tobacco sector. In line with recent changes to the tobacco taxation, we simulate a 15 percentage point increase in the internal tax on cigarettes.…”

Achieving policy impact on tobacco economics research: experiences and lessons learnt

“…The papers included in this supplement span the regions of Asia, Latin America, and Southeastern Europe. The research focuses on consumer responses to cigarette price increases (Divino et al, 14 Nguyen et al, 15 Vladisavljevic et al 16 ) as well as their distributional impacts (Cruces et al, 17 Gligorić et al, 18 Divino et al, 19 Cizmovic et al, 20 Nguyen et al 15 ). Two papers analyse tax leakages along the tobacco supply chain: Vladisavljevic et al 16 use data from a primary survey in the Southeastern European region to analyse determinants of tobacco tax evasion and Drope et al examine the regional implications of the tobacco value chain in Paraguay.…”