Distributional Effects of Tobacco Taxation: A Comparative Analysis

32 Pages Posted: 9 Apr 2019

See all articles by Alan Fuchs

Alan Fuchs

World Bank - Poverty Reduction and Economic Management Network (PRMVP)

Maria Fernanda Gonzalez Icaza

World Bank

Daniela Paula Paz

Harvard University - Center for Business and Government

Date Written: April 8, 2019

Abstract

Tobacco taxes have positive impacts on health outcomes. However, policy makers often hesitate to use them because of the perception that poorer households are affected disproportionally more than richer households. This study compares the simulated distributional effects of tobacco tax increases in eight low- and middle-income countries. It applies a standardized extended cost-benefit analysis methodology and relies on comparable data sources across countries. The net effect of raising taxes on cigarettes encompasses the direct negative price shock to household budgets and the long-term benefits of improved health outcomes. The distributional incidence is assessed by estimating decile-specific behavioral responses and relative income gains. The comparative results do not support the claim that tobacco taxes are necessarily regressive. Although welfare losses from the first-order price shock disproportionally affect the poor, these negative shocks are attenuated by greater price-responsiveness among lower-income groups and further offset by higher long-term relative gains through reduced medical expenditures and additional years of productive life as taxes dissuade smoking. In several countries, increasing the price of cigarettes is pro-poor and welfare improving for a large share of the population. Along with raising taxes, policy should aim at encouraging responsiveness to price changes and target tobacco-related medical expenses that disproportionally burden the poor.

Suggested Citation

Fuchs, Alan and Gonzalez Icaza, Maria Fernanda and Paz, Daniela Paula, Distributional Effects of Tobacco Taxation: A Comparative Analysis (April 8, 2019). World Bank Policy Research Working Paper No. 8805, Available at SSRN: https://ssrn.com/abstract=3368579

Alan Fuchs (Contact Author)

World Bank - Poverty Reduction and Economic Management Network (PRMVP) ( email )

Washington, DC 20433
United States

Maria Fernanda Gonzalez Icaza

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Daniela Paula Paz

Harvard University - Center for Business and Government ( email )

John F. Kennedy School of Government
79 JFK Street
Cambridge, MA 02138
United States

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