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The need for large taxes increases

October 17, 2019

Tobacconomics recently published the policy brief "Large Tax Increases Are the Most Effective Policy for Reducing Tobacco Use".

Evidence worldwide made tobacco taxes the core recommendation of the World Heatlh Organization (WHO) Framework Convention on Tobacco Control (FCTC). However, taxes remain quite low, especially in middle-low income countries. Moreover, in recent decades these countries have experienced rapid economic growth, which has led to increased income levels and tobacco products remain affordable.

Why? When the real price (Price inflation-adjusted) decreases or does not grow in line with the increase in income, it helps to increase consumption.

As explained in the policy note, a "large" increase in taxes that reduce affordability is necessary to have a significant impact on tobacco consumption. The concept of "large" increase refers to a significant price increase, which must be at least larger than the sum of per capita income growth and inflation.

The concept of affordability includes the income effect and price effect. Therefore, this is calculated at the country level as the percentage of gross domestic product (GDP) required to purchase 100 packs of cigarettes, known as Relative Income Price (RIP).

Therefore, it is not just about increasing taxes but about reducing the affordability of the product. In such manner, the magnitude and frequency of the increase in taxes are important to have a negative effect on consumption.

A clear example is the Philippines, that adopted its tax reform in 2012, which increased taxes on all cigarettes. In the cheapest brand, the tax rose from 2.72 pesos per pack (2012) to 30 pesos per pack (2017). In addition, the RIP increased by 109% during this period. Both changes meant that buying a pack of cigarettes in 2016 needed more than twice the resources than four years before.

In conclusion, an increase in taxes that is in line only with inflation will not have the desired effects on consumption. In contrast, frequent large increases that sharply increase the price of cigarettes and make them less affordable, can reduce the prevalence of smoking.