The Distributional Effects of a Tobacco Tax Reform in Mexico: Social Welfare Improvements from Fiscal Reforms [Working Paper Series]

This Working Paper was written by the Centro de Investigación en Alimentación y Desarrollo (CIAD) in Mexico. The working paper examines the distributional effects of tobacco taxation by income group in Mexico. Low-income smokers are more responsive to price than high-income smokers, as an increase of 1 peso per stick would reduce consumption by 40% and 33.6%, respectively. As a result, the findings show that a large increase in the specific component of the tax would be slightly progressive although the tax burden would increase among all income groups. The gap in the tax paid by low- and high-income smokers would decrease following a tax increase. The researchers estimate that increasing the tax by 1 peso per cigarette stick (leading to a tax of 1.50 per stick) would increase progressivity by 8.37 points on the Kakwani index. These results show that tobacco taxes benefit the poor and improve equity in the country. The working paper concludes with recommendations for policy makers to raise tobacco taxes and reap the associated public health and fiscal benefits, especially for the low-income group. 

A Policy Brief based on the working paper can be found here.