Economic Implications of Cigarette Taxation in Pakistan: An Exploration Through a CGE Model

This Report was written by the Social Policy and Development Centre in Pakistan. The report discusses the macroeconomic and distributional impacts of changes in tobacco use prevalence in response to an increase in tobacco taxes. The researchers use computable general equilibrium (CGE) modeling to estimate the impact on tax revenues, consumption, raw tobacco production, cigarette manufacturing, employment, and the overall economy. Currently, tobacco farming and cigarette manufacturing accounts for less than 0.5% of the country's GDP, while the cigarette industry employs 0.2% of the industrial labor force. Simulating an increase of the effective excise tax share to 70%, the study finds that this would reduce consumption by 32.5%, while revenue from cigarettes would increase by 102%. The raw tobacco output would decrease by 7.8% due to the declining demand, and the output of the cigarette industry would decrease by 32.4%. Although this would lead to a 41.5% decline in employment income in the cigarette industry, the overall employment income in the economy would increase by 0.5% and 308,550 new jobs would be created. The report concludes that the impact of increasing cigarette taxes would be positive on the economy, although small in magnitude. 

A Policy Brief based on the report can be found here.