Publication: Long-Run Impacts of Increasing Tobacco Taxes: Evidence from South Africa
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2018-02-26
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2018-03-08
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Tobacco taxes are considered an effective policy tool to reduce tobacco consumption and produce long-run benefits that outweigh the costs associated with a price increase. Through this policy, some of the most adverse effects and economic costs of smoking can be reduced, including shorter life expectancy, higher medical expenses, added years of disability among smokers, and the effects of secondhand smoke. Nonetheless, tobacco taxes are often considered regressive because low-income households tend to allocate a larger share of their budgets to purchasing tobacco products. This paper uses an extended cost-benefit analysis to estimate the distributional effect of tobacco taxes on household welfare in South Africa. The analysis considers the effect on household income through an increase in tobacco prices, changes in medical expenses, and the prolongation of working years. Results indicate that a rise in tobacco prices initially generates negative income variations across all groups in the population. If benefits through lower medical expenses and an expansion in working years are considered, the negative effect is reduced, particularly in medium- and upper-bound elasticities. Consequently, the aggregate net effect is progressive and benefits the bottom deciles more than the richer ones. Overall, tobacco tax increases exert a small, but positive effect in the presence of low conditional tobacco price elasticity. If the population is more responsive to tobacco price changes (or participation elasticity estimates are included) then they would experience even more gains from the health and work benefits. More research is needed to clarify the distributional effects of tobacco taxation in South Africa.
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“Fuchs, Alan; Del Carmen, Giselle; Mukon, Alfred Kechia. 2018. Long-Run Impacts of Increasing Tobacco Taxes: Evidence from South Africa. © World Bank. http://hdl.handle.net/10986/29439 License: CC BY 3.0 IGO.”
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Publication Long-Run Impacts of Increasing Tobacco Taxes(Washington, DC: World Bank, 2018-03)Tobacco taxes are considered an effective policy tool to reduce tobacco consumption and produce long-run benefits that outweigh the costs associated with a price increase. Through this policy, some of the most adverse effects and economic costs of smoking can be reduced, including shorter life expectancy, higher medical expenses, added years of disability among smokers, and the effects of secondhand smoke. Nonetheless, tobacco taxes are often considered regressive because low-income households tend to allocate a larger share of their budgets to purchasing tobacco products. This paper uses an extended cost-benefit analysis to estimate the distributional effect of tobacco taxes on household welfare in South Africa. The analysis considers the effect on household income through an increase in tobacco prices, changes in medical expenses, and the prolongation of working years. The results indicate that a rise in tobacco prices initially generates negative income variations across all groups in the population. If benefits through lower medical expenses and an expansion in working years are considered, the negative effect is reduced, particularly in medium- and upper-bound elasticities. Consequently, the aggregate net effect is progressive and benefits the bottom deciles more than the richer ones. Overall, tobacco tax increases exert a small, but positive effect in the presence of low conditional tobacco price elasticity. If the population is more responsive to tobacco price changes (or participation elasticity estimates are included), then they would experience even more gains from the health and work benefits. More research is needed to clarify the distributional effects of tobacco taxation in South Africa.Publication The Distributional Effects of Tobacco Taxation(World Bank, Washington, DC, 2018-06-25)Despite the well-known positive impact of tobacco taxes on health outcomes, policy makers hesitate to use them because of their possible regressive effect, that is, poorer deciles are proportionally more negatively affected than richer ones. Using an extended cost-benefit analysis to estimate the distributional effect of white and clove cigarettes in Indonesia, this study finds that the long-run impact may be progressive. The final aggregate effect incorporates the negative price effect, but also changes in medical expenditures and in additional working years. The analysis includes estimates of the distributional impacts of price rises on cigarettes under various scenarios using 2015–16 Indonesia National Socioeconomic Surveys. One contribution is to quantify the impacts by allowing price elasticity's to vary across consumption deciles. Overall, clove cigarette taxes exert an effect that depends on the assumptions of conditional price elasticity. If the population is more responsive to tobacco price changes, then people would experience even more gains from the health and work benefits. More research is needed to clarify the distributional effects of tobacco taxation in Indonesia.Publication The Distributional Effects of Tobacco Taxation(World Bank, Washington, DC, 2018-08)Despite the well-known positive impact of tobacco taxes on health outcomes, policy makers hesitate to use them because of their possible regressive effect, that is, poorer deciles are proportionally more negatively affected than richer ones. Using an extended cost-benefit analysis to estimate the distributional effect of white and clove cigarettes in Indonesia, this study finds that the long-run impact may be progressive. The final aggregate effect incorporates the negative price effect, but also changes in medical expenditures and additional working years. The analysis includes estimates of the distributional impacts of price rises on cigarettes under various scenarios using 2015–16 Indonesia National Socioeconomic Surveys. One contribution is to quantify the impacts by allowing price elasticities to vary across consumption deciles. Overall, clove cigarette taxes exert an effect that depends on the assumptions of conditional price elasticity. If the population is more responsive to tobacco price changes, then people would experience even more gains from the health and work benefits. More research is needed to clarify the distributional effects of tobacco taxation in Indonesia.Publication The Welfare and Distributional Effects of Increasing Taxes on Tobacco in Vietnam(World Bank, Washington, DC, 2019-06)This paper assesses the welfare and distributional effects of raising taxes on tobaccoin Vietnam. Tobacco taxes are recognized as effective policy tools to reduce tobaccoconsumption and to improve health outcomes. However, policy makers often hesitateto use them because of claims of their potentially regressive effects. According to thoseclaims, poorer households are particularly hurt by tobacco tax policies, as cigarettepurchases represent a larger share of their budgets relative to higher-income smokers.The paper argues that the claims on the regressive effects of tobacco tax policies arebased on naive, shortsighted, and incorrect estimations. Tobacco-related illnessesdamage health outcomes and the quality of the lives of smokers and their families, whilethey also cost billions of dollars in medical expenditures and losses in human capital andproductivity every year. Tobacco consumption imposes heavy economic burdens onhouseholds and governments, in addition to its well-known negative health and socialimpacts. Raising taxes on cigarettes dissuades consumption, hence improving healthoutcomes, adverting premature deaths, and reducing direct and indirect economic costs.The analysis applies the Extended Cost Benefit Analysis (ECBA) methodology to simulateempirically the costs, as well as the benefits of increasing the prices on cigarettes onthe welfare of Vietnamese households. Following a well-established body of literature,the ECBA acknowledges that there may be short-term direct negative effects of raisingprices on tobacco, as smokers can struggle to continue to purchase tobacco with theirunchanged household budgets. However, the model also incorporates two of the mainbenefits of reducing tobacco consumption by increasing taxes: (a) the reduction insmoking-related medical expenses borne by households and (b) the additional incomesthat households can earn by preventing years of productive life lost due to smoking attributablepremature deaths. A critical contribution of the ECBA is to incorporate decile-specific price elasticities of demand for cigarettes, to quantify the behavioral responses or sensitivity of smokers in different income groups to changes in cigarette prices. To the knowledge of the authors, this is the first available empirical exercise to estimate price elasticities by income decile in Vietnam. Consistent with the literature and with empirical findings in other countries, the price elasticities of demand for cigarettes are larger for lower-income households. Lower income smokers are likely to reduce their tobacco consumption more drastically, when faced with a price increase. The ultimate distributional effect on welfare of the increasein the price of cigarettes due to tax increases will then depend on assessing the potentialbenefits against the short-term costs.Publication The Distributional of Impacts of Cigarette Taxation in Bangladesh(World Bank, Washington, DC, 2018-06-01)Despite the obvious positive health impacts of tobacco taxation, an argument raised against it is that poor households bear the burden of the increased prices because of their higher share of spending on tobacco. This report includes estimates of the distributional impacts of price rises on cigarettes under various scenarios using the Household Income and Expenditure Survey (HIES) 2016/17. One contribution of this analysis is to quantify the impacts by allowing price elasticities to vary across consumption deciles. This shows that an increase in the price of cigarettes in Bangladesh has small consumption impacts and does not significantly change the poverty rate or consumption inequality. These findings stem from relatively even cigarette consumption patterns between less and more welloff households. These results hold even if one considers some small substitution through the use of bidis, which are largely consumed by the poor. The short-term consumption impacts are also negligible compared with the estimated gains because of savings in medical costs and the greater number of productive years of life.
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