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Cigarette prices in a complex cigarette tax system: empirical evidence from Indonesia
  1. Bagus Wahyu Prasetyo1,
  2. Vid Adrison2
  1. 1 Graduate Program in Economics, Faculty of Economics and Business, Universitas Indonesia, Depok, Indonesia
  2. 2 Graduate Program in Economics, Faculty of Economics and Business, Universitas Indonesia, Depok, Indonesia
  1. Correspondence to Vid Adrison, Graduate Program in Economics, Faculty of Economics and Business, Universitas Indonesia, Depok 16424, Indonesia; vadrison{at}yahoo.com

Abstract

Background The complex cigarette tax system in Indonesia has created the opportunity for cigarette producers to avoid tax, which results in affordable cigarette prices. In addition to increasing cigarette tax every year, the government has adopted several policies to increase cigarette prices, such as reducing the number of tiers and applying cigarette tax based on the combined production of affiliated companies (ie, firms with a minimum 10% ownership of another cigarette company, sharing the same boards of commissioners or using input from other tobacco companies, in which a firm has at least 10% ownership).

Objective To investigate the effect of cigarette tax, affiliated company rules and changes in the number of tiers on cigarette prices produced in Indonesia.

Method Using brand level data from 2005 to 2017, we model cigarette prices as a function of cigarette tax, affiliated company rules, number of tiers, cigarette types and cigarette tax system using random effect and fixed effect estimations.

Finding We find that a percentage increase in cigarette tax increases cigarette prices by less than 1% for all cigarette types. The implementation of affiliated company rules is effective in increasing cigarette prices for both affiliated and non-affiliated firms. We also find that a fewer number of tiers are associated with a higher cigarette price. Our results suggest that a reduction in the number of tiers will increase the effectiveness of a specific tax system in making cigarettes less affordable.

  • taxation
  • price
  • economics
  • low/middle income countries
  • tobacco industry
  • tax pass-through
  • multi tiers
  • indonesia
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Footnotes

  • Contributors BWP collected the data and other relevant information for the study, conducted the analysis and prepared the manuscript as a master thesis at the University of Indonesia. VA designed the study, conducted statistical analysis, wrote and revised the manuscript.

  • Funding This study was funded by Universitas Indonesia (http://dx.doi.org/10.13039/501100006378) and grant number: HIBAH PITTA 2018.

  • Competing interests None declared.

  • Patient consent for publication Not required.

  • Provenance and peer review Not commissioned; externally peer reviewed.

  • Data availability statement Data are available upon reasonable request.

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