Cigarette Consumption, Taxation, and Household Income : Indonesia Case Study

Abstract

Cigarette consumption has been increasing in Indonesia, as in many other developing countries, causing a rising burden of disease and premature death. Higher excise taxes have proved effective in many countries in reducing cigarette consumption and raising government revenues. This study examines the effect of higher prices/taxes on the decision to smoke, the quantity of cigarettes consumed by smokers in different income groups in Indonesia, and government revenues. It uses 1999 Social and Economic Survey (SUSENAS) household data, with households as the unit of analysis. There was at least one smoker in 57 percent of all households. Most households smoked kretek cigarettes with filters (64 percent), or without filters (31 percent). Average household monthly cigarette consumption was 18 packs of 16 cigarettes. Per capita cigarette consumption was higher for higher income households: 7.83 packs per month, compared to 4 packs for low-income households. On average, households spent 6.22 percent of their total income on cigarettes and kreteks, lower-income households spent the highest percentage. The study suggests that price is not a significant factor in household decisions to smoke or not, but has a significant effect on the quantity of cigarettes smoked: each 10 percent increase in price would reduce total cigarette consumption by 6 percent. The reduction would be higher-nearly 7 percent-among low-income households, and lower-3 percent-among high-income households. Cigarette consumption increases as income rises: a 10 percent increase in household income would increase consumption by 6.5 percent, with a particularly strong effect among low-income households-a 9 percent increase-but little change among high income households-an increase of less than 1 percent. Simulations show that a 10 percent tax increase that raised cigarette prices by 4.9 percent would reduce consumption by 3 percent, and increase tax revenues by 6.7 percent, ceteris paribus, including assuming no significant switching among cigarette products with different prices and tax levels.