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A simulation model to predict the fiscal and public health impact of a change in cigarette excise taxes

Abstract

Objectives (1) To present a model that predicts changes in cigarette consumption and excise revenue in response to excise tax changes, and (2) to demonstrate that, if the industry has market power, increases in specific taxes have better tobacco control consequences than increases in ad valorem taxes.

Design All model parameters are user-determined. The model calculates likely changes in cigarette consumption, smoking prevalence and excise tax revenues due to an excise tax change. The model is applicable to countries that levy excise tax as specific or ad valorem taxes.

Results For a representative low-income or middle-income country a 20% excise tax increase decreases cigarette consumption and industry revenue by 5% and increases excise tax revenues by 14%, if there is no change in the net-of-tax price. If the excise tax is levied as a specific tax, the industry has an incentive to raise the net-of-tax price, enhancing the consumption-reducing impact of the tax increase. If the excise tax is levied as an ad valorem tax, the industry has no such incentive. The industry has an incentive to reduce the net-of-tax price in response to an ad valorem excise tax increase, undermining the public health and fiscal benefits of the tax increase.

Conclusions This paper presents a simple web-based tool that allows policy makers and tobacco control advocates to estimate the likely consumption, fiscal and mortality impacts of a change in the cigarette excise tax.

If a country wishes to reduce cigarette consumption by increasing the excise tax, a specific tax structure is better than an ad valorem tax structure.

  • Taxation and price
  • economics

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