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Tobacco Control Policy The Challenge of Raising Tobacco Taxes

Tobacco Control Policy The Challenge of Raising Tobacco Taxes. Global and Regional Experience by Ayda A. Yurekli, Ph.D World Bank World Bank ECA Regional PCU Conference, Warsaw, Poland September 9, 2001. Why is Raising Tobacco Taxes a Policy Challenge? . Tobacco taxes are NOT new taxes

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Tobacco Control Policy The Challenge of Raising Tobacco Taxes

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  1. Tobacco Control PolicyThe Challenge of Raising Tobacco Taxes Global and Regional Experience by Ayda A. Yurekli, Ph.D World Bank World Bank ECA Regional PCU Conference, Warsaw, Poland September 9, 2001

  2. Why is Raising Tobacco Taxes a Policy Challenge? • Tobacco taxes are NOT new taxes • Challenging, because • higher taxes improve public health, but • Policy makers worry about the economic consequences of higher taxes

  3. Why increase tobacco taxes • Good for public health • Improve health outcomes • Change smoking behavior • Youth and the poor are more sensitive • Increase budget share for other goods and services • Good for economy • Generate revenues • Won’t necessarily reduce employment • Won’t necessarily increase smuggling

  4. Why are higher taxes good for public health? • Change Smoking Behavior • As tax increases consumption decreases • A 10% increase in price reduces consumption by: • 4% in developed countries, • 8% in developing countries • Poor and Youth are more sensitive • A 10% price increase reduces smoking as much as 10% among youth and the poor. • Deter youth taking up smoking • High opportunity costs • Higher budget share for other goods and services

  5. Price Elasticity EvidenceAs tax increases, consumption decreasesEvidence from Turkey

  6. Price Elasticity EvidenceAs tax increases, consumption decreasesEvidence from Hungary

  7. High opportunity cost for smokers and their families

  8. High Opportunity Cost in Bulgaria

  9. Will higher tobacco taxes be good for the economy? Why do policy makers worry? • reduce revenues? • Tobacco generates revenues • Excise +VAT tax revenues • Import tariffs • Income taxes • cause job losses? • Create employment opportunities • In agriculture- farmers- and industry • accelerate smuggling activities? • Means less revenues, • more criminal activities

  10. Tobacco Taxes- Important source of revenue!

  11. Tobacco Taxes- Important source of revenue!

  12. Tobacco Tax Revenues:Who Earns, How Much?

  13. Tobacco Tax Revenues:Who Earns, How Much?

  14. Revenue Generating Potential of Tobacco TaxesEmpirical Arguments Depends on several factors. • Consumption level • Tobacco tax rates • Retail price of cigarettes • Income • Price and income elasticity of demand • Control of smuggling activities

  15. As Cigarette Tax Rises Revenue IncreasesTax per pack and cigarette tax revenues in Norway, 1990-1998

  16. Evidence from Hungary: Since 1997 the tax rate has increased, and so has total revenue (in real terms)

  17. Tobacco Tax Rates and Prices: Where ECA fits in the Globe!

  18. Global (European) Evidence:Total and Excise Tobacco Taxes as % of Retail Price 2000 Total tobacco tax= Excise+VAT, Excise = (Specific+Ad Valorem)

  19. Regional Evidence: ECATotal and Excise Tobacco Taxes as % of Retail Price

  20. Do high tax rates mean high prices? Not in ECA countries!

  21. Cigarette prices lower than most food products in Bulgaria

  22. High tax rates and high average prices of cigarettes in EU

  23. Will higher taxes lead to smuggling:What is the Solution?Canadian Government reduced tobacco tax rates dramatically in February 1993

  24. Sweden decreased cigarette taxes (17%) due to fear of smuggling in 1998

  25. Recommendations to control smuggling • Require that all cigarette exporters, manufacturers and distributors have a license and keep detailed records • Make cigarette exporters post a bond that will only be returned when it is proven that the cigarettes have reached their final destination: and • Require that unique markings be placed on cigarette packages so that smuggled cigarettes can be traced back to their source.

  26. Employment is decreasing for several reasons:Efficiency, technology and privatization

  27. RecommendationsIncreasing taxes:Win win situation for both public health and the economy. • Higher taxes will generate higher revenues while reducing consumption • There is still room to increase cigarette taxes in ECA countries due to inelastic demand, and low tax rates • Reducing tax rates is not a solution for smuggling • Employment in cigarette manufacturing is reduced for different reasons other than reduced consumption ?

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