Publication: Are Tobacco Taxes Really Regressive?: Evidence from Chile

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Fuchs, Alan
Meneses, Francisco
Tobacco taxes are deemed regressive as poorest families tend to allocate larger shares of their budget to purchase tobacco. However, as taxes also discourage tobacco use, some of the most adverse effects, including higher medical expenses, lower life expectancy at birth, added years of disability among smokers, and reductions in the quality of life, among other, will be reduced. This paper describes and simulates the effects of the tobacco tax on incomes in Chile assuming three different price-elasticity scenarios for different income deciles of the population. Results show that although price increase for tobacco through higher taxes generates negative income variations across all groups in a population, under a more comprehensive scenario that includes benefits through lower medical expenses and an increase in working years, the results invert, and the overall monetary effect of the taxation policy becomes positive. Moreover, the reduction in medical expenses seems to be the main driver of the increase in net incomes because of the reduction in tobacco-related problems that require expensive treatments. 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.
Fuchs, Alan; Meneses, Francisco. 2017. Are Tobacco Taxes Really Regressive?; Are Tobacco Taxes Really Regressive? : Evidence from Chile. © World Bank, Washington, DC. License: CC BY 3.0 IGO.
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