Tobacco taxes have positive impacts on health outcomes. However, policy makers often hesitate to use them because of the perception that poorer households are affected disproportionally more than richer households. This study compares the simulated distributional effects of tobacco tax increases in eight low-and middle-income countries. It applies a standardized extended cost-benefit analysis methodology and relies on comparable data sources across countries. The net effect of raising taxes on cigarettes encompasses the direct negative price shock to household budgets and the long-term benefits of improved health outcomes. The distributional incidence is assessed by estimating decile-specific behavioral responses and relative income gains. The comparative results do not support the claim that tobacco taxes are necessarily regressive. Although welfare losses from the first-order price shock disproportionally affect the poor, these negative shocks are attenuated by greater price-responsiveness among lower-income groups and further offset by higher long-term relative gains through reduced medical expenditures and additional years of productive life as taxes dissuade smoking. In several countries, increasing the price of cigarettes is pro-poor and welfare improving for a large share of the population. Along with raising taxes, policy should aim at encouraging responsiveness to price changes and target tobacco-related medical expenses that disproportionally burden the poor.
Background
Georgia has one of the highest smoking prevalence and tobacco-related morbidity and mortality rates in Europe and Central Asia. Nonetheless, tax increases on tobacco products are often opposed due to concerns of regressive fiscal effects. This article provides evidence on the long-term welfare and distributional impacts of increasing cigarette taxes in Georgia.
Methods
An Extended Cost-Benefit Analysis is used to simulate the distributional effect of raising taxes on cigarettes. It weighs short-term losses due to higher tobacco prices with long-term benefits related to reduced medical expenses and additional earnings associated with extended life expectancy. Household expenditure data are used to estimate decile-specific price elasticities of demand for cigarettes, accounting for heterogeneous behavioral responses by income-group.
Results
Consistent with previous literature, cigarettes price elasticity decreases with income. A simulated 50% cigarette price increase would yield positive net gains for the lowest three deciles; increase the available income of the poorest 10% of the population by an average of 1% and, as a result, lift up to 7000 people out-of-poverty in 2017. The effects would be highly progressive.
Conclusions
As lower-income households tend to be more responsive to price changes on cigarettes, they stand to benefit most from the health and economic consequences of taxing tobacco. This article shows that in addition to boosting fiscal revenues, increasing cigarette prices would lead to progressive and positive net gains for the poorest households in Georgia.
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.