Tobacco excise tax policy in Indonesia: who does reap the benefits?

Abstract

In Indonesian tobacco, excise tax policy never decrease every year. As a result, the number of tobacco industries sharply declines, however the prevalence of tobacco smoking steadily increase since 1995. Therefore, this research aims to estimate the increase of tobacco excise tax and its impact on cigarette consumption, government revenue, and the possibility of cigarette sold illegally. There are two analytical model, Logit and Tobit. Logit model is used to estimate the impact of cigarette price towards the probability of household member to smoke or not, and Tobit model is used to estimate the impact of price change towards the amount of cigarette consumption. Tobit model is employed since it include non-smoker household, covering 40% of total household. The estimation is based on SUSENAS published on March 2017. The result suggests increasing cigarette prices does not lessen people desire to be smokers; indicating that most Indonesian consider cigarette as basic needs. Consequently, the increase of tobacco excise tax leads to the growth of government revenue and number of illegally sold cigarette. Therefore, it conclude that large-scale industries benefit the most, when this result is linked to the decrease of tobacco industries data. Meanwhile, Indonesian people may get the benefit, if the government revenue is appropriately allocated to stimulate economic and development.

Does the increase in the cigarette excise tax affect cigarette consumption?

“…The 12.5% increase in the cigarette excise tax in 2021 has had no effect on cigarette usage, as prices remain accessible for both workers and non-workers. This remains consistent with the findings of Prasetyo & Adrison [10] and Santoso & Erlando [12] in 2020, adding to the growing body of evidence recommending that cigarette costs be increased even further in order to minimize cigarette consumption. Average public expenditures on cigarettes are shown in Figure 13.…”

“…This phenomenon is corroborated by data from the WHO's 2019 Global Tobacco Epidemic Report, which indicates that Indonesia is one of the Asia-Pacific region's countries with the lowest cigarette prices in 2018 (Table 1). This is due to both the regular increases in excise and cigarette prices that Indonesia implements while remaining below the rate of inflation and the increase in the level of people's incomes [12]. Meanwhile, in a number of high-income countries, the overall increase in household income was followed by an increase in cigarette excise, ensuring that the increase in cigarette prices remained greater than the overall increase in household income [33].…”

“…Santoso and Erlando demonstrate through secondary data analysis that a rise in cigarette pricing does not diminish people's desire to become smokers. Rather, it demonstrates that the majority of Indonesians regard cigarettes to be a basic need [12]. In the context of the importance of cigarette excise in minimizing the negative externalities of cigarettes, this paper presents the most recent findings regarding the effectiveness of the government-imposed rise in cigarette excise in 2021 on cigarette use.…”

“…The researcher employs Knoepfel's theory of policy effectiveness in assessing the effectiveness of the policy of increasing cigarette excise. Because Knoepfel's theory is centered on behavior modification, it is more applicable for researchers to utilize and comprehend changes in cigarette consumption behavior prior to and following the increase in cigarette excise [12]. The more researchers understand regarding consumption behavior of cigarettes, the more precise policy could be made [13].…”

The effect of cigarette prices and income on cigarettes consumption and state revenue: Case study of 33 provinces in Indonesia

“…Rising cigarette prices and a drastic increase in tax rates are the Korean government's alternative policies. Santoso & Erlando (2020) shows that when a cigarette price is above IDR 1,000, the percentage of family members to smoke is 58 percent. However, with the retail price per stem, the demand curve is nearly perfectly inelastic, which means that an increase in the price of cigarettes will not significantly reduce the demand for cigarettes.…”