Increasing Tobacco Taxation Reduces Inequality with Insignificant Impact on Poverty

This Policy Brief was written by the Institute of Economic Sciences (IES) in Serbia. The policy brief examines the impact of two different tobacco tax increase scenarios on poverty and inequality. Specifically, the researchers consider a 25% and 50% increase in the specific excise tax. The findings suggest that tobacco excise taxes are progressive and raising excise taxes would reduce the tax burden that low-income households face. These scenarios would result in a very small increase in poverty as the poverty headcount would grow up to 1 percentage point. However, additional policies could be implemented to reduce or even reverse this impact, such as allocating additional tax revenues to subsidize beneficial goods and services that represent significant budget shares among lower-income households. The policy brief concludes with recommendations for policy makers to raise tobacco taxes to reduce inequality and strategically dedicate additional tax revenues to benefit those in poverty.

The corresponding Working Paper can be found here.