Increasing Taxes on Tobacco in Low and Middle-Income Countries: Hurting or Saving the Poor?

Policy makers hesitate to increase tobacco taxes over concerns about taxes being regressive and potentially increasing poverty and inequality. This note summarizes a set of studies of the effects of raising tobacco taxes in 11 low and middle-income countries using an extended cost-benefit analysis (ECBA) and harmonized national household budget survey data and introduces the TOBACTAX Tool. The studies find that demand price elasticities for tobacco products are larger among lower-income households and that the poor receive the largest long-term gains from tobacco taxation. Tobacco taxes have progressive long-term effects due to lower medical expenses and added years of productive life, which contribute to poverty reduction in most countries studied. TOBACTAX Tool can help replicate such analyses elsewhere.


Alan Fuchs Tarlovsky and María Fernanda González Icaza
Policy makers hesitate to increase tobacco taxes over concerns about taxes being regressive and potentially increasing poverty and inequality.This note summarizes a set of studies of the effects of raising tobacco taxes in 11 low and middle-income countries using an extended cost-benefit analysis (ECBA) and harmonized national household budget survey data and introduces the TOBACTAX Tool.The studies find that demand price elasticities for tobacco products are larger among lower-income households and that the poor receive the largest long-term gains from tobacco taxation.Tobacco taxes have progressive long-term effects due to lower medical expenses and added years of productive life, which contribute to poverty reduction in most countries studied.TOBACTAX Tool can help replicate such analyses elsewhere.
Tobacco is a major public health priority (WHO 1999).Smoking is the second leading cause of death and disability worldwide, killing over 8 million people each year (Ng et al. 2014;WHO 2017) The sample of 11 countries in this study represents over 860 million people, or 15 percent of smokers worldwide.

Methodology
The ECBA 1 Equation 1 quantifies medium to long-terms benefits as tobacco taxes rise, based on 3 effects.

Equation 1: ECBA Conceptual Framework
The immediate effect of raising taxes on cigarettes increases household tobacco expenditures (A).

Tobacco Demand Price Elasticity
Evidence suggests that price elasticities of demand for tobacco may be higher in lower-income settings (World Bank 1999).The distributional and welfare effects of tobacco taxation ultimately depend on the responsiveness of consumers to changes in tobacco prices (WHO 2011a).An equivalent price change of 10 percent in low and middle-income countries would likely result in a 6 percent average fall in demand (IARC 2011).
Less dependence on nicotine, larger peer effects, and limited disposable income may also make younger people less likely to buy tobacco when prices increase (Jha and Peto 2014).

Study Results
We assume a tax increase that raises the prices of tobacco products by 100 percent in each country.While different patterns emerge across countries, our main findings are that higher tobacco taxes: • Decrease household disposable income, without behavioral adjustments • Reduce medical expenditures across all deciles and countries • Lowers workers' mortality modestly in all deciles and countries • Adds working years • Reduce poverty Doubling the price of tobacco could lower the total number of extreme poor by 1.1 to 2.0 million, equivalent to lifting 1.7 percent to 2.0 percent of the poor out of extreme poverty.
Table 2 approximates the changes in the number of poor in each country if the price of cigarettes were increased by 100 percent.

Conclusions
There is reason for optimism about the long-term economic and health benefits of increasing tobacco taxes.While households will likely experience short-term welfare losses, in addition to health benefits, taxes on tobacco generate medium and long-term economic benefits, including higher labor productivity and fewer The analysis found net benefits for 80 to 90 percent of the population analyzed.Despite differences in the magnitude and distribution of the net welfare effects across countries, the distributional impact of raising taxes on cigarettes is generally progressive: across countries, lower-income households capture the largest relative benefits.

Introducing TOBACTAX Tool for Global Analysis
Comprehensive policy strategies are needed related to tobacco usage and taxation.Inducing changes in tobacco consumption that translate into net social gains requires country-specific policies that meet that country's consumer responses, especially among youth and at-risk groups.
The Poverty and Equity Global Practice has developed a user-friendly tool-TOBACTAX-to aid policy practitioners and academics in estimating the welfare and distributional impacts of implementing tobacco tax reforms.TOBACTAX contributes to global knowledge by applying the ECBA methodology to any country with available household survey data and minimal data requirements.Using the STATA software, TOBACTAX estimates the price-elasticities of tobacco by income decile, and it assesses the impacts of increasing taxes on tobacco on household income and distributional outcomes.
The TOBACTAX tool can be accessed here.

Next Steps
Extending the comparative ECBA study to other countries requires more data sources.Including countries with the highest numbers of smokers-such as China and India-will add to the understanding of the global implications of raising taxes on tobacco for longterm welfare and distributional outcomes.
, and triggering an array of policy initiatives.Tobacco taxation is considered the most efficient intervention (World Bank 1999): by boosting prices, taxes induce smokers to quit and discourage potential consumers.Evidence suggests that higher taxes are responsible for almost half the decline in smoking worldwide (WHO 2014).The retail prices of tobacco products represent only a fraction of overall costs from smoking to societies.In addition to health consequences, smoking cuts earnings potential and labor productivity, and lowers human capital accumulation and economic growth (WHO 2015a).Goodchild, Nargis, and Tursan d'Espaignet (2018) estimate that tobacco-related diseases accounted for 5.7 percent of global health expenditure in 2012 and that total economic costs of smoking, including health expenditures and productivity losses, were equivalent to 1.8 percent of the world's gross domestic product (GDP).Yet, policy makers hesitate to raise tobacco taxes because of concerns that poorer households may face higher costs.Evidence on the effects of taxing tobacco in developing countries remains scant.Nearly 80 percent of the world's smokers live in low and middle-income countries.Yet, to the authors' knowledge, this is the first cross-country analysis on the distributional welfare effects of taxing tobacco based on harmonized household consumption and other international data.
2 Taxes discourage smoking and health outcomes and thus improve, at least 2 indirect benefits to households: These countries vary widely in income, sociodemographic characteristics, and tobacco consumption patterns.They range from lower-middle-income countries (Bangladesh has the lowest GDP per capita) to upper-middle (Mexico, Russia) and high-income countries (Chile).The main source of data are national household budget surveys in each country.For several countries, the study also used datasets and work of other researchers and studies. 4If available, we used surveys with nationally representative data for 2016.Otherwise, we used the most recent publicly available datasets.In most countries, poorer or middle-income households spend a larger share of their budgets on tobacco.In half the sample (Bosnia and Herzegovina, Georgia, Mexico, Moldova, Russia, and South Africa), people in the wealthiest decile are most likely to smoke.However, lower-income households allocate larger shares of consumption to tobacco.Except in Bosnia and Herzegovina, the richest 10 percent consistently allocates the smallest share.Indonesia and Vietnam exhibit the highest smoking prevalence rates in the sample; on average, 64 percent of households in Indonesia and 58 percent of households in Vietnam consume tobacco.To maintain data consistency across countries, the analysis adapted direct medical expenditures from the calculations ofGoodchild, Nargis, and Tursan   d'Espaignet (2018), who used data on the cost of illness to estimate the direct medical costs of smokingattributable diseases in 2012.We collected data on mortality, years of life lost, and morbidity for 2016 from the Global Burden of Disease (GBD) Project.For the shares of total health expenses financed through out-ofpocket health expenditures, we used the World Development Indicators (WDI) database.

Figure 1 :
Figure 1: Illustrates the estimated price elasticities of demand for cigarettes by decile