Do Tobacco Taxes Harm the Poor in Asia?: A Review of Evidence from the Region
In an effort to build the evidence base on the economics of tobacco taxation in low- and middle-income countries, Tobacconomics has been working with local think tanks since 2017. The evidence produced under the Think Tanks Project addresses the questions outlined in six research core competency questions (shown below). Each of these questions represents an important topic of discussion in fiscal policy development. We hope that policy makers will use these findings to guide and improve tobacco taxation policies (check out the Tobacconomics Cigarette Tax Scorecard to learn about current policies).
In this blog, we discuss the research from our think tank partners in Asia which focuses on the third core competency and examines the impact of tobacco taxes on the poor. The blog is part of a larger series, where we delve into evidence relating to each research competency by region (Asia, Latin America, and Southeastern Europe).
|#||Research Core Competency Questions|
|1||How do consumers of tobacco respond to tobacco taxes, and how would consumers respond to tax increases and other structural reforms to fiscal policies?|
|2||How would a given fiscal policy affect the price of tobacco products, and how would this change in price affect government revenues, consumption, and health outcomes?|
|3||How would the fiscal policy affect the poor?|
|4||What are the health and economic costs of a given unhealthy behavior and how can the fiscal policy address these costs?|
|5||How would the fiscal policy affect employment and economic growth?|
|6||To what extent is the fiscal policy related to illicit trade of tobacco products?|
Economists in Asia assessed the impact of tobacco tax increases and tax reforms on the income distribution, with particular emphasis on low-income populations. Although the tobacco industry often discourages governments from increasing tobacco taxes by claiming that they are regressive, and thus, would disproportionately harm poor smokers, the research outlined below shows that this is not the case.
Impact of Tobacco Spending on Household Budgets
Across Asia, low-income households spend a significant portion of their budgets on tobacco products. In Pakistan, 3.0% of spending in lower-income households went towards purchasing tobacco products. This is a higher share relative to wealthier households, who spend 1.8% of their budget on tobacco. Similarly, low-income Vietnamese households dedicate a larger share of their budgets to tobacco than middle- or high-income households (2.19%, 2.02%, and 1.56%, respectively).
When households dedicate a share of their budgets to tobacco, this reduces spending on other, more productive goods and services. Economists call this the “crowding out effect.” This is especially significant for poor households that struggle to afford even the bare necessities.
Researchers in Pakistan simulated a 50% reduction in tobacco expenditure in low- and high-income households. They found that this reduction would significantly increase spending on necessary and beneficial goods and services in low-income households: 47% of the additional spending would be dedicated towards basic food, while 21% would go towards health care in poorer households. In Vietnam, tobacco spending crowds out spending on education in low-income households, which can threaten future economic mobility and well-being of households.
Additionally, there are long-term consequences to smoking and tobacco use. As smokers face poor health outcomes related to tobacco use, they face more medical expenses and earn less income due to tobacco-attributable illness and premature death. And it is not only the smoker who absorbs these losses, but also the household. In Vietnam, researchers estimate that spending on tobacco products and the related health care costs increased the number of people living in poverty by 305,090, including 117,785 children. This effect especially harms the country’s ethnic minority populations. The impoverishing effect of tobacco impacted 0.76% of this group, compared to 0.23% of the main ethnic groups, Kinh and Hoa. The poverty gap also increased more among ethnic minorities- 0.30%, compared to 0.04% among the Kinh and Hoa groups, respectively.
Price Sensitivity by Income Group
When faced with a price increase, low-income tobacco users tend to reduce consumption more than higher-income tobacco users. Researchers measure this difference in price responsiveness by estimating the price elasticity of demand for tobacco products in different income groups (check out our blog on the first core competency to learn more). Since low-income users are more likely to reduce tobacco consumption or quit altogether, the burden of tax increases would fall largely on high-income users.
In Bangladesh, the low-income group (bottom 60%) was more than twice as responsive to cigarette price increases as the high-income group (top 40%). A 10% price increase would reduce demand for cigarettes by 9% and 3.9% in each group, respectively. These findings suggest that a significant tobacco tax increase would reduce consumption among all smokers, but especially among poor smokers in the country.
A difference in price responsiveness by income was found in Pakistan as well. Researchers estimate that a 10% increase in the price of cigarettes would reduce demand by 11.4% among lower-income smokers (bottom 60%), and a 10% increase in the price of chewed tobacco would reduce demand by 7.5%. On the other hand, this price increase would not significantly impact consumption among high-income smokers (top 40%). Another study identified income as one of the most important determinants in a smoker’s maximum willingness to pay per cigarette stick. Poorer smokers are not able to spend as much money on cigarettes as wealthier smokers, which provides an opportunity for policy makers to decrease smoking in this group.
Although the tobacco industry claims that tobacco control, and especially tobacco taxation, harms low-income individuals, these strategies are actually crucial to greater anti-poverty efforts across Asia. Raising tobacco taxes effectively reduces consumption in this group, which decreases future medical tobacco-related expenses and increases productivity for a net positive effect in the long-term.