Raising Cigarette Taxes Would Not Lead to an Increase of Illicit Trade in Brazil

This Policy Brief was written by Universidade Católica Brasília (UCB) in Brazil. The policy brief examines the own-price and cross-price elasticities of licit and illicit cigarettes. The researchers find that increasing the price of licit cigarettes by 10% would reduce consumption by 4.12%, without causing a demand-switching effect towards the illicit market. A 10% increase in the price of illicit cigarettes would reduce consumption by 2.53%, while increasing licit cigarette consumption by between 0.76% and 1.46%. These findings suggest that some smokers of illicit cigarettes would switch to the licit market in response to a price increase, while smokers of licit cigarettes would not switch to the illicit market following a price increase. The policy brief concludes with recommendations for effective tobacco tax policies that would reduce consumption and raise revenues without an increase in illicit cigarette consumption. 

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A corresponding Working Paper and additional Policy Brief can be found here and here, respectively.