presentation 2 what are the factors considered in determining the “right” tax rate for tobacco...
TRANSCRIPT
PRESENTATION 2
What are the factors considered in determining the “right” tax rate for
tobacco products? Workshop on tobacco prices and tax
World Health Organization (WHO) and International Union Against Tuberculosis and
Lung Disease (The Union)
Questions for the end of the sessionWhat factors do governments consider in deciding
the “right” tax rates for tobacco products?
In addition to health, what other social welfare goals may be achieved through tobacco taxation?
What is a market failure? How does this apply to the tobacco market?
What is an externality? How does this apply to tobacco consumption?
What is the “right” tax rate?Factors that government use to decide the
optimal (tobacco) tax rates include -revenue, employment and other economic
goals-compliance with existing legislation-health and social welfare goals -correcting for market failures
RevenueCigarette tax revenues can form an important and stable
part of government revenues. In some countries, tax rates are based on annual
revenue targets in the government’s annual budget.
World Bank, 1999
Employment and support to domestic industry may be a factor –particularly where some production is
not mechanized, i.e, Indonesia
In Indonesia, the government established preferential tax rates for hand-rolled kretek firms, to promote employment.
They also apply tariffs for imported tobacco products, which increase the prices for imported products and provide some protection for the domestic industry.
Studies on the employment effects of reductions in tobacco consumption
Type of Country Name and year Net change as % of employment in base year
Net Exporters US (1993) 0%
UK (1990) 0.5%
Zimbabwe (1980) -12.4%
Balanced Tobacco Economies
South Africa (1995)
0.4%
Scotland (1989) 0.3%
Net Importers Bangladesh (1994) 18.7%
Source:Buck and others, 1995; Irvine and Sims, 1997; McNicoll and Boyle 1992, van der Merwe and others, background paper; Warner and others 1996
The impact of an 1-2 RMB (US$1.30) tax increase on the Chinese tobacco industry
1 RMB 2 RMB Reduction in cigarette consumption (billion packs) -0.15* 3.1 6.2 Total sales revenue loss (billion RMB)** -0.15 8.4 16.8 Industry net revenue loss (billion RMB) -0.15 4.72 9.44 Industry employment Loss (number of employees) -0.15 1,656 3,312
TW Hu et al 2009
Legislation increase? Revenue impact? Effect on deaths?• Domestic legislation may specify
maximum excise tax rates, i.e, Indonesia• Countries that have ratified the WHO FCTC
will need to consider tax and price measures
WHO FCTC Article 6
• Implement.. tax policies and, where appropriate, price policies on tobacco products so as to contribute to the health objectives aimed at reducing tobacco consumption and
• Prohibit.. or restrict..as appropriate, sales to and/or importations by, international travellers of tax-and duty-free tobacco products
Health and social welfare goals increase? Revenue impact? Effect on deaths?• Promoting health by reducing prevalence
and consumption • Reducing poverty. Through its negative
effect on health, tobacco consumption would be expected to reduce labor productivity, and possibly reduce earnings and savings.
• Protecting children. Children and adolescents may be up to three times more sensitive to price changes. Therefore, higher tobacco prices tend to have strong impact on their uptake and consumption.
Taxes are used to correct for market failures increase? Revenue impact? Effect on deaths?A market failure results when the market fails
to allocate resources efficiently from what is optimal for the society
In the tobacco market, market failure occurs because
• Knowledge is not perfect• Existence of “externalities” or external costs
and benefits• Market power
Imperfect knowledge increase? Revenue impact? Effect on deaths?Governments intervene in the tobacco market
because
Consumers are unlikely to have full knowledge of the health risks and the risks of addition when they start smoking. The majority of smokers start < 19 years of age.
Advertising can mislead or mis-inform-- i.e, “light,” “low tar” may mislead consumers to believe that they are using less dangerous products.
Time inconsistent behaviors increase? Revenue impact? Effect on deaths?• People place a higher value on the present
vs the future• This results in decisions with short-term
gains (smoking, eating desserts, overconsumption of alcohol) over much greater long-term gains (years of additional life)
• US study that takes into consideration the value of health damage for smokers suggest that the price of cigarettes should be US$ 35 per pack (Gruber 2008).
Correcting for externalities– or external costs and benefits
increase? Revenue impact? Effect on deaths?Individuals do not solely bear the risks of
their consumption decisions related to tobacco.
Smokers impose physical and financial costs on others, and on the society as a whole-environmental tobacco smoke-costs of health care for tobacco-related conditions that
is paid for by public funds-diminished work productivity and increases in sick days-workplace maintenance, fires
Market power increase? Revenue impact? Effect on deaths?Governments can intervene in the tobacco
market because: • It is usually an oligopoly – that is, a few
firms hold the majority market share.• When there may be collusion and price
fixing• Significant barriers to entry exist
Indonesian tobacco market:3 firms hold >70% of market share
increase? Revenue impact? Effect on deaths?Table 5.2. Market share, major cigarette firms, 1979-2005
Cigarette manufacturer (year established) 1979 1989 1998 2005 Gudang Garam (1958)
12
28
47
41
Djarum (1951) 13 28 13 15 British American Tobacco (BAT, 1905) 15 3 NA 4 Bentoel (1930) 8 11 3 3 Sampoerna (1913) 1 3 12 - Sampoerna/Philip Morris International (2005) - - - 15 Philip Morris Indonesia (1998) NA NA NA 6 Sumatra Tobacco Trading Company (STTC) 10 4 NA NA Noyorono 4 3 2 4 Total 63 80 77 88 Other 37 20 23 12
Sources: Euromonitor International 2007, Jardin Fleming Research 1999, Bird 2002. NA is not available
What about equity: do higher tobacco taxes hurt poor smokers?
• Poor smokers tend to spend the highest percent of their income on tobacco
• How do they react to a tax/price rise ? more likely to quit/reduce consumption,
which will improve health outcomes, release income for other uses
Government can use increased tax revenue in ways that benefit poor
18
It is important to weigh the benefits and costs: example of a tobacco tax increase in China
Cigarette consumption reduction
3 billion packs
Central government tax revenue increase
US $10.4 billion
Cigarette industry gross revenue loss
US $0.57 billion
Farmers tobacco leaf sale reduction
26,053 metric tons
Quitting smoking
4.1 million smokers
Employment loss
1656 workers
Reduction in plantation
14,400 hectares
Income lossUS $0.03 billion
Local government tax revenue loss US $0.006 billion
Lives saved
1 million
Medical cost savings
$US 100 million
Productivity gain
US $360 million
*Assuming additional 1 RMB per pack at the price elasticity of the demand for cigarette is -0.15 at 2000 price level.
1 RMB / Pack TaxIncrease
ReviewWhat factors do governments consider in deciding
optimal tax rates for tobacco products?
In addition to health, what other social welfare goals may be achieved through tobacco taxation?
What is a market failure? How does this apply to the tobacco market?
What is an externality? How does this apply to tobacco consumption?
Small group discussionWhat are the benefits and costs of a tobacco tax
increase in your country?
• Break into small groups• Compare and contrast your countries in terms of
the most important factors that your governments consider when setting the tobacco tax rates (20 minutes)
• Make a short presentation identifying common factors across countries in your group.