Higher Tobacco Tax Benefits the Indonesian Economy

This Policy Brief was written by the Center for Indonesia's Strategic Development Initiatives (CISDI) in Indonesia. The policy brief simulates three tax increase scenarios and estimates the macroeconomic impact of each, including the impact on total output, income, and employment. The first scenario analyzes the 2020 tax increase, in which the excise tax on kretek and cigarettes is increased by 23.78% and 27.15%, respectively. The second scenario increases excise taxes on cigarettes by 30%, while the third one increases taxes by 45%. The findings show that higher taxes would lead to a greater reduction in consumption in addition to generating higher tax revenue compared to the more modest tax increase. Further, increasing cigarette taxes would have a net positive impact in terms of the aggregate economic output, employment, and income. The policy brief concludes by recommending that Indonesia improve its cigarette tax policy in an effort to reap the macroeconomic benefits in addition to the individual-level public health benefits. 

A corresponding Report can be found here.