The Potential Benefits of Effective Cigarette Tax Policies: Evidence from Asia
Over the last several years, Tobacconomics has partnered with think tanks in low- and middle-income countries to produce local evidence on the economics of tobacco taxation. Our research efforts are guided by six research core competencies (shown below), which represent timely and relevant topics of discussion related to tobacco taxes. Despite the body of global evidence on the benefits of effective tobacco taxation, most countries are missing out due to ineffective tax policies (check out the Tobacconomics Cigarette Tax Scorecard to learn about current policies).
Below, we delve into the findings from our think tank partners in Asia related to the second research core competency, as part of a larger series where each blog will be dedicated to a competency in one of the three regions where we work (Asia, Latin America, and Southeastern Europe).
| # | Research Core Competency Questions |
| 1 | How do consumers of tobacco respond to tobacco taxes, and how would consumers respond to tax increases and other structural reforms to fiscal policies? |
| 2 | How would a given fiscal policy affect the price of tobacco products, and how would this change in price affect government revenues, consumption, and health outcomes? |
| 3 | How would the fiscal policy affect the poor? |
| 4 | What are the health and economic costs of a given unhealthy behavior and how can the fiscal policy address these costs? |
| 5 | How would the fiscal policy affect employment and economic growth? |
| 6 | To what extent is the fiscal policy related to illicit trade of tobacco products? |
Our partners in the Asia modelled the revenue, consumption, and health impacts of alternate tax structures and rates. Their findings, described below by country, are consistent with existing literature on the economics of tobacco taxes. Raising tobacco taxes and implementing evidence-based best taxation practices would improve fiscal and public health across the region. The results from their simulations can be used by policy makers to improve cigarette taxation and raise additional revenue, while improving health outcomes.
Bangladesh
Bangladesh currently administers a complex multi-tier ad valorem excise tax system on tobacco products. Economists conducted several studies to understand the effect of alternate tax structures.
Working with tobacco control partners in the country, Tobacconomics produced two fact sheets which simulate an increase of the excise tax rate to 65% of the retail price and raise the minimum price across all brands in fiscal years 2021-2022 and 2022-2023 (Table 1). Both simulations, conducted one year apart, show that Bangladesh would benefit significantly from changes to their cigarette tax policy. Importantly, the positive effect on public health is paired with an increase in tax revenue collection.
|
Table 1 |
Adults who quit smoking (compared to status quo) |
Youths who initiated smoking (compared to status quo) |
Smoking-attributable deaths (compared to status quo) |
Tax revenue (BDT) (compared to status quo) |
|
FY 2021-2022 |
+1.1 million |
-800,000 |
-790,000 |
+300 billion |
|
FY 2022-2023 |
+1.3 million |
-893,000 |
-790,000 |
+396 billion |
Most recently, our think tank partner, ARK Foundation modeled an increase in the base price of low-tier cigarettes to BDT 37 to 45 and an increased excise tax rate to 55% to 65% for low-tier cigarettes. The researchers examined the impact of these policies together and separately on tax revenue collection. Assuming that both policies were implemented, the government would raise between BDT 34.90 billion and 42.01 billion in additional revenue. On the other hand, if only the base price increased, tax revenues would decrease, while tobacco company profits would increase.
Indonesia
In Indonesia, the government administers a multi-tier specific excise tax on cigarettes. Our partner in the country examined the macroeconomic effects of a tax increase.
CISDI examined the impact of a 30% tax increase and a 45% tax increase compared to the baseline, which reflects the recent tax increase of 27.15% for kretek cigarettes and 23.78% for white cigarettes (Table 2). The findings show that all of the tax increases would lead to a reduction in consumption of both tobacco products, as well an increase in tax revenue collection. The more aggressive tax increase of 45% would be especially beneficial for Indonesia by significantly reducing consumption and raising the most additional revenue.
|
Table 2 |
Tax increase |
White cigarette consumption (compared to the status quo) |
Kretek consumption (compared to the status quo) |
Tax revenue (IDR) (compared to the status quo) |
|
Baseline |
+23%-27% |
-12.79% |
-17.32% |
+4.68 trillion |
|
Scenario 1 |
+30% |
-14.24% |
-20.62% |
+5.72 trillion |
|
Scenario 2 |
+45% |
-19.50% |
-27.72% |
+7.92 trillion |
Pakistan
Pakistan, similarly, employs a multi-tier specific excise tax structure with very low prices and taxes on tobacco. Two think tanks in the country modeled alternate tax scenarios and their effects on public health and tax revenue.
PIDE simulated three scenarios and their respective impact on tax revenues and public health, assuming that cigarette companies would not transmit the complete tax burden onto consumers (Table 3). The first scenario analyzes the projected effect of the implemented increases to Federal Excise Duty (FED) rates for the three tiers. In the second scenario, the researchers consider a two-tier system. Finally, the third scenario examines the impact of the revised FED rates within a two-tier system. Both Scenarios 2 and 3, which represent a two-tier tax system, would raise additional revenues for the government and improve public health relative to the current three-tier one. The two-tier structures each have their strengths: Scenario 2 would raise more revenues, while Scenario 3 would improve public health more significantly.
|
Table 3 |
Adults who quit smoking (compared to status quo) |
Adults and youth who initiated smoking (compared to status quo) |
Cigarette consumption (compared to status quo) |
Tax revenue (PKR) (compared to status quo) |
|
Three-tier |
+1.2 million |
-60,000 |
-16% |
+11.59 billion |
|
Two-tier |
+1.7 million |
-80,000 |
-23.6% |
+13 billion |
|
Two-tier with FED increase |
+2.4 million |
-120,000 |
-33% |
+11.8 billion |
SPDC modeled the impact of an increase in the FED rate in FY 2021-2022, following the shift to a two-tier system in FY 2018-2019. Specifically, the think tank considered a 30% increase (Scenario 1) and a 40% increase (Scenario 2) (Table 4). These changes to the FED rate would deter individuals from smoking by reducing affordability in addition to increasing tax collection. While the 40% increase in the FED would have a greater impact on public health, it would raise less tax revenues compared to a 30% increase.
|
Table 4 |
FED increase |
Adults who quit smoking (compared to status quo) |
Adult smoking-attributable deaths (compared to status quo) |
Tax revenue (PKR) (compared to status quo) |
|
Scenario 1 |
+30% |
+219,000 |
-424,000 |
+19 billion |
|
Scenario 2 |
+40% |
+377,000 |
-565,000 |
+14 billion |
Following the passage of the Finance Act of 2021, which maintained the FED rates for the third year in a row, SPDC compared the effect of this baseline scenario to an increase by 30% (Scenario 1), and 20%, which would maintain affordability at the FY 2020-2021 level (Scenario 2) an economic model (Table 5). The researchers show that cigarette consumption is increasing under the current FED rates as cigarettes are becoming more affordable. Although this would marginally increase revenues, both a 20% and 30% increase in the FED would more substantially increase tax collection while reducing consumption.
|
Table 5 |
FED increase |
Adults who quit smoking (compared to status quo) |
Adult smoking-attributable deaths (compared to status quo) |
Tax revenue (PKR) (compared to status quo) |
|
Baseline |
N/A |
+232,000 |
+81,000 |
+5.8 billion |
|
Scenario 1 |
+30% |
-220,000 |
-77,000 |
+30 billion |
|
Scenario 2 |
+20% |
-79,000 |
-27,000 |
+34 billion |
Vietnam
The uniform ad valorem tax structure in Vietnam uses low wholesale prices as a base rather than retail prices. Our think tank partner examined the impact of a mixed excise tax system with a specific excise component, instead.
DEPOCEN examined the impact of three specific tax amounts on low- and high-price cigarette markets. The authors model the tax increases under four different assumptions of the tax pass-through to consumers and the resulting change in illicit cigarette prices (shown as a range in Table 6). The researchers find that the smokers of low-price domestic brands are more likely to quit compared to smokers of high-price foreign brands in response to a price increase in each scenario. The results also show that more smokers would opt out of purchasing any of the cigarette brands studied when faced with the highest specific tax amount, which suggests that they may intend to quit.
|
Table 6 |
Specific tax per cigarette (VND) |
Low-price market share (compared to status quo) |
High-price market share (compared to status quo) |
Opt-out |
|
Scenario 1 |
1000 |
-2.11 to -3.31 |
-0.26 to -0.69 |
1.77% to 2.17% |
|
Scenario 2 |
2000 |
-4.01 to -6.10 |
-0.52 to -1.35 |
3.15% to 4.09% |
|
Scenario 3 |
5000 |
-8.78 to -11.90 |
-1.34 to -3.03 |
6.66% to 9.15% |
The evidence presented above highlights the value of effective cigarettes tax policies. In their simulations, our think tank partners demonstrate the benefits that governments can reap from well-designed tax systems. Not only can tobacco taxes serve as a significant source of revenue, but they can reduce consumption, thus preventing tobacco-attributable death and disease.
Stay tuned for upcoming blogs where we will discuss findings on alternate tax structures and rates in Latin America and Southeastern Europe!