Distributional Effects of Tobacco Taxation: A Comparative Analysis

Abstract

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.

Potential impact of eliminating illicit trade in cigarettes: a demand-side perspective

“…The finding that smokers in LMICs are more 'price sensitive' is also consistent with cross-sectional studies where lower income smokers have higher price elasticities than medium-and-high-income smokers. 11 19 We adapt these findings to the illicit market by applying the following price elasticities: −0.8 for smokers of lowest price illicit packs in LMICs; −0.5…”

The potential global gains in health and revenue from increased taxation of tobacco, alcohol and sugar-sweetened beverages: a modelling analysis

“…For example, governments could fund programmes to help consumers quit smoking, reduce alcohol consumption and/or choose healthy food alternatives. Poorer households have higher sensitivity to price changes and receive disproportionately larger benefits from reduced health expenditure39 40 and revenue-neutral programmes can be targeted at consumers who may bear the brunt of the tax, particularly poorer households. Finally, the tax revenues can defray less efficient and more distortive taxes, such as taxes on labour, to improve household outcomes 41…”

Extended cost–benefit analysis of tobacco taxation in Brazil

“…There are at least three channels by which a tobacco tax increase could affect social welfare 2. The first channel is that higher cigarette prices due to higher tobacco taxation reduces cigarette consumption and prevents smoking initiation.…”

“…Therefore, the methodological choice might underestimate the benefits of taxation as it will not be able to capture all these channels.) Based on two 2017 and 2018 studies,2 3 we estimate the impact of these channels by estimating price elasticity of tobacco and calculating the welfare gains among various income groups resulting from a tobacco tax increase that raises cigarette prices and lowers tobacco consumption.…”