Objectives: To identify key economic issues that need to be addressed for raising the tobacco tax and to recommend possible options for tobacco tax reform in China.
Methods: Estimated price elasticities of the demand for cigarette smoking, prevalence data, and epidemiology are used to estimate the impact of a tobacco tax increase on cigarette consumption, government tax revenue, lives saved, employment and revenue loss in the cigarette industry and tobacco farming.
Results: An increase of one RMB (or US $0.15) per pack of cigarettes will increase the Chinese government's tax revenue by 85.4 billion RMB (US 10.41 billion), decrease consumption by 3.1 billion packs of cigarettes, reduce the number of smokers by 4.1 million, and save 1 million lives. The short-term loss to the tobacco economy will be about 6.00 billion RMB (only 74% of the government tax gain).
Conclusion: The empirical economic analysis and tax simulation results clearly indicate that increasing the tobacco tax in China is the most cost-effective instrument for tobacco control.
What this paper adds: This paper provides a concrete recommendation for tobacco tax policy. It also provides comprehensive estimates of the impact of a tobacco tax increase on the Chinese economy.
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