The Net Impact of Higher Tobacco Taxation on Output, Income, and Employment is Positive

This Policy Brief was written by the Institute of Economic Sciences (IES) in Serbia. The policy brief examines the macroeconomic impacts of tobacco tax increases in Serbia. The researchers simulate both a 25% and 43.6% specific excise tax increase, under six scenarios for the reallocation of the additional tax revenue collected. The results show that the net impact of increasing tobacco taxes is positive when output, income, and employment are considered as long as at least 80% of the additional revenue is reallocated. Further, dedicating a larger portion of this revenue towards health services, social work activities, and education is positively associated with the overall net impact on output, income, and employment. Following a 43.6% excise tax increase, and assuming that 25% of the additional revenue would be reallocated towards agriculture and food production, 25% towards education and science, and 50% towards health and social work, the output and household income would increase by RSD 16 billion and 4.5 billion, respectively. 5,300 new jobs would be created under this scenario as well. The policy brief concludes with recommendations for policy makers to significantly raise tobacco taxes and reallocate the revenue collected strategically.

A corresponding Working Paper can be found here.