Increasing Tobacco Taxes Benefits Low-Income Households the Most

This Policy Brief was written by the Institute of Economic Sciences (IES) in Serbia. The policy brief assesses the distributional impact of tax increases through changes in tobacco consumption, smoking-related medical costs, productivity, and household budgets in three income groups in the country. The researchers simulate a 10% and 43.6% increase in the specific excise tax of tobacco, which would result in a 5.1% and 22.4% price increase, respectively. The increase in price would lead to a reduction in tobacco spending in the low-income group in both scenarios. Medical expenses would decrease among all of the income groups, while productivity would increase because of the reduction in the years of working life lost. These changes are most significant for low-income smokers compared to the other income groups. In total, the larger excise tax increase of 43.6% would result in a net gain of 2.9% for the low-income group, 1.3% for the middle-income group, and 0.01% for the high-income group. The policy brief concludes with recommendations for policy makers to significantly raise tobacco taxes as a progressive policy option for tobacco control.

A corresponding Working Paper can be found here.