Publication: Tobacco Price Elasticity and Tax Progressivity in Moldova
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2018-01
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2018-02-06
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The study estimates the tobacco price elasticity of demand for the population of Moldova, and the price elasticity for 10 income groups is obtained. This appears to be the first tobacco price elasticity estimation for income groups in Moldova. The study undertakes an extended cost-benefit analysis to estimate the distributional effect of a rise in tobacco taxes on income distribution. As inputs, it uses tobacco price elasticity, mortality attributed to tobacco, and the medical costs of tobacco-attributed diseases.
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“Fuchs, Alan; Meneses, Francisco. 2018. Tobacco Price Elasticity and Tax Progressivity in Moldova. © World Bank. http://hdl.handle.net/10986/29329 License: CC BY 3.0 IGO.”
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Publication Tobacco Price Elasticity and Tax Progressivity in Moldova(World Bank, Washington, DC, 2018-02)Tobacco-use–related diseases are the main cause of mortality in Moldova, where tobacco consumption is widely spread, especially among men. In addition to health concerns, tobacco consumption has economic consequences, as households spend substantial resources on tobacco and related out-of-pocket medical costs. Tobacco tax increases are one of the most effective measures to reduce tobacco consumption, but are usually believed to be regressive, taxing the poor proportionally more than the rich. This paper estimates the tobacco price elasticity of demand for Moldova by income decile and undertakes an extended cost-benefit analysis to estimate the distributional effect of a rise in tobacco taxes on income distribution. The paper's main findings are that a tobacco price increase would generate a rise in expenditure deriving from direct tobacco price increases, but would reduce the costs of out-of-pocket medical expenses. Based on these two factors, the net effect of a tobacco tax increase would be progressive in the analyzed cases, ultimately benefitting the incomes of the lower-income groups in the population.Publication Regressive or Progressive?(World Bank, Washington, DC, 2017-09-27)Tobacco taxes are usually considered regressive as the poorest individuals allocate larger shares of their budget towards the purchase of tobacco related products. However, because these taxes also discourage tobacco use, some of the most adverse effects and their economic costs are reduced, including lower life expectancy at birth, higher medical expenses, increased years of disability among smokers, and the effects of secondhand smoke. 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Lastly, as the distributional effects of tobacco taxes are directly related to the long-term price elasticities of tobacco consumption, it will be advisable a coordination between taxation and behavioral change policies across income groups.Publication Long-Run Impacts of Increasing Tobacco Taxes(World Bank, Washington, DC, 2018-02-26)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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