The Welfare and Distributional Effects of Increasing Taxes on Tobacco in Vietnam
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.
| Main Authors: | , |
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| Format: | Report biblioteca |
| Language: | English |
| Published: |
World Bank, Washington, DC
2019-06
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| Subjects: | TOBACCO TAX, TOBACCO CONSUMPTION, DISTRIBUTIONAL IMPACT, PRICE ELASTICITY OF DEMAND, COST-BENEFIT ANALYSIS, TAXATION, |
| Online Access: | http://documents.worldbank.org/curated/en/758391561477648302/The-Welfare-and-Distributional-Effects-of-Increasing-Taxes-on-Tobacco-in-Vietnam https://hdl.handle.net/10986/32062 |
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| Summary: | 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. |
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