TOBACCO TAXATION INCIDENCE: EVIDENCE FROM RUSSIA TOBACCO TAXATION INCIDENCE: EVIDENCE FROM RUSSIA Alan Fuchs, Mikhail Matytsin and Olga Obukhova October 2018 I CONTENTS Summary VII Background VII Methods VII Findings VII Interpretation VII Funding IX Acknowledgment IX 1. Introduction 1 2. Literature Review 5 3. Model 9 4. Data and descriptive statistics 11 Data 11 Smoking prevalence in Russia 11 Tobacco price elasticity by decile 13 Mortality and morbidity 13 Tobacco-related medical costs 15 Baseline descriptive results 17 5. Results 19 Tobacco price increase 19 Medical expenses 20 Income gains deriving from an increase in working life years 21 Net effects: total distributional impact 22 6. Discussion 25 Tobacco Taxation Incidence: Evidence from Russia References 26 Annexes 31 A. Model 31 Change in tobacco expenditure 31 Medical expenses 32 Increase in working life years 32 B. Tobacco Price Elasticity by Decile 33 C. Estimating direct health care costs associated with the provision of medical care related to tobacco-related diseases 35 D. Robustness: Simulation Using Data on Individuals 40 LIST OF FIGURES Figure 1– Smoking Prevalence, Russian Federation (ages 16–75) 12 Figure 2 – Income Gains: Direct Effect of Tobacco Taxes (Increase in Expenditure because of tobacco taxes), by Decile 20 Figure 3 – Income Gains: Medical Costs of Tobacco Taxes (Reduction in Medical Expenditures), by Decile 21 Figure 4 – Income Gains: Production during Years Lost, by Decile 22 Figure 5 – Total Income Effect: Direct and Indirect Effects of Tobacco Taxes (Tobacco price increase, medical expenditure, and working years gained), by Decile 23 IV // Contents LIST OF TABLES Table 1– Cigarette Price Elasticities, by Decile 13 Table 2 – Tobacco Related Deaths, by Gender and Age-Group, Russian Federation, 2016 14 Table 3– Tobacco-Related Events, by Gender, 2016 15 Table 4– Years of Life Lost, by Gender, 2016 16 Table 5 – Baseline Descriptive Results, 2016, by Decile 17 Table 6 - Direct Effect of Price Increase through Taxes (%), by Decile 19 Table 7 - Reduction in Medical Costs (%), by Decile 20 Table 8 – Years of Working Life Lost (%), by Decile 21 Table 9 - Net Effect on Household Expenditures (%), by Decile 23 Table B.1 – Regression Results, by Model 33 Table D.1 – Cigarettes Price Elasticities, by Decile 40 Table D.2 - Direct Effect of Price Increase through Taxes (%), by Decile 40 Table D.3 - Reduction in Medical Costs (%), by Decile 40 Table D.4 – Years of Working Life Lost (%), by Decile 40 Table D.5 - Net Effect on Household Expenditures (%), by Decile 41 V SUMMARY Background The implementation of tobacco taxes is considered one of the most effective ways to discourage tobacco use. This policy has a direct impact on household incomes, especially among low-income households that are more likely to allocate a larger proportion of their budget to buying smokes. To assess the net welfare gains from this policy, one must look beyond the direct impact on household income and consider other benefits of lower tobacco consumption, including a reduction in medical costs and an increase in the potential working years associated with good health. Methods Using an extended cost-benefit analysis to estimate the distributional effect of cigarettes in the Russian Federation, this paper finds that the long-run impact may in fact be progressive. The methodology applied incorporates the negative price effect caused by an increase in tobacco taxes, combined with a presumed future reduction in medical expenditures and a rise in working years caused by a reduction in the rate of smoking among the population. The analysis includes estimates of the distributional impacts of price rises on cigarettes under various scenarios based on information taken from the Russia Longitudinal Monitoring Survey–Higher School of Economics (RLMS-HSE) for 2010– 16. One contribution is the quantification of impacts by allowing price elasticities to vary across consumption deciles. Findings Overall, cigarette taxes exert a positive long-term effect on household incomes, though the magnitude depends on the structure of the conditional price elasticity. If the population is more responsive to tobacco price changes, then it would experience greater gains from the health and extended work-life benefits. Interpretation The results support the use of tobacco taxation as an effective means to reduce tobacco consumption, raise government revenues, increase public health and promote income equality. VII Funding Support in the preparation of this report has been provided by the World Bank’s Global Tobacco Control Program, co-financed by the Bill and Melinda Gates Foundation and Bloomberg Philanthropies. Acknowledgment Fuchs: Poverty and Equity Global Practice, World Bank (email: afuchs@worldbank.org). Matytsin: Poverty and Equity Global Practice, World Bank (email: mmatytsin@worldbank. org). Obukhova: Ministry of Health Russian Federation (email: obuhova@mednet.ru) The authors are grateful to Patricio Marquez, Sevil Salakhutdinova, Daria Khaltourina, Polina Kuznetsova, and Daniela Paz for providing inputs, comments and support for this paper. The findings, interpretations, and conclusions in this research note are entirely those of the authors. They do not necessarily represent the views of the World Bank Group, its Executive Directors, or the countries they represent. IX THE RUSSIAN FEDERATION (RU HAS ONE OF THE HIGHEST SMOKIN PREVALENCE RAT IN THE WORLD, PARTICULARLY AMONG MEN. ACCORDING TO THE GLOBAL ADU 1 INTRODUCTION The World Health Organization estimates that tobacco kills more than 7 million people worldwide each year (WHO 2017a). It is the second leading cause of death and disability worldwide and is among the major preventable causes of disease and premature death globally (Doll and Hill 1956; Ng et al. 2014; Wynder and Graham 1950). Diseases associated with tobacco use include lung cancer, stroke, ischemic heart disease, and respiratory diseases (DHHS 2004). Nearly 80 percent of the world’s smokers live in low- and middle- income countries and are less likely to be informed about the adverse health effects of tobacco use relative to individuals in high-income countries. The Russian Federation is one of the largest producers and consumers of tobacco; 50 percent of the men and almost 14 percent of the women smoke (30 percent overall), above the average in the countries with high human development indexes.1 2 Tobacco taxes are often considered regressive because the share of household budgets allocated to tobacco products is larger among low-income households than among high- income households. This paper shows that, if behavioral and indirect effects, especially health-related effects, are taken into account, this is no longer valid. The long-run benefits of not smoking offset the costs associated with tobacco taxes among low-income groups and the overall population. Potential benefits include a reduction in medical expenditures and an increase in healthy life years, factors that translate into economic benefits that outweigh the losses created by tax increases if consumers quit or never start smoking. This paper describes and quantifies the medium- and long-run effects of tobacco tax increases on aggregate household welfare through three channels. The first channel implies that higher tobacco prices because of higher taxes induce a behavioral response involving a reduction and cessation in tobacco consumption that is manifest particularly among people who discontinue smoking and younger individuals who do not start smoking. The second channel is associated with a reduction in medical expenses associated with the averted treatment costs of tobacco-related diseases, and the third is a rise in incomes because of gains in years of employment derived from an extension in life expectancy. To assess the impact of these effects, this paper estimates the price elasticity of tobacco, simulates upper- and lower-bound scenarios, and calculates the welfare gains among various income groups. 1 2016 Global Adult Tobacco Survey (GATS), Russian Federation Factsheet: http://www.who.int/tobacco/surveillance/survey/gats/ rus_factsheet_2016.pdf?ua=1 2 The Human Development Index (HDI) is a summary measure of average achievement in key dimensions of human development: having a long and healthy life, being knowledgeable and having a decent standard of living. The HDI is the geometric mean of normalized indices for each of the three dimensions. The measure was introduced and measured by the United Nations Development Programme (UNDP). 1 Tobacco Taxation Incidence: Evidence from Russia The study is structured as follows. Section 2 reviews the literature on the health effects of tobacco, the economic costs associated with tobacco-related diseases, tobacco tax policies, and price elasticities. Section 3 presents an overview of the data used to estimate the impact of the tobacco tax. Section 4 examines the results. The final section concludes with a discussion on policy implications. 2 // Introduction 3 THE RUSSIAN FEDERATION (RU HAS ONE OF THE HIGHEST SMOKIN PREVALENCE RAT IN THE WORLD, PARTICULARLY AMONG MEN. ACCORDING TO THE GLOBAL ADU 2 LITERATURE REVIEW Stefler et al. (2018) estimate that the population share associated with smoking among cancer deaths in Russia was 25 percent.3 Close to 300,000 Russians died because of tobacco-related illnesses (GBD 2016). A 2002 study by the WHO suggests that tobacco- related diseases may shorten the healthy years of life by 13.6 years4 (Mathers et al. 2002). This has negative consequences on human capital development and imposes a growing economic burden because smoking decreases earnings potential and labor productivity. Several studies have quantified the economic cost of smoking, though most have been carried out in high-income western countries (Guindon et al. 2007). Goodchild, Nargis, and Tursan d’Espaignet (2018) find that tobacco-related diseases accounted for 5.7 percent of global health expenditure in 2012 and that the total economic costs of smoking, including health expenditure and productivity losses, were equivalent to 1.8 percent of the world’s gross domestic product (GDP) (US$1.85 trillion in purchasing power parity U.S. dollars). According to these authors, upper-middle-income countries, such as Russia, experience almost a third of this burden.5 Estimates for the economic burden in the case of Russia vary between US$8 billion and US$17 billion (Potapchik and Popovich 2014; Goodchild, Nargis, and Tursan d’Espaignet 2018). Tobacco price increases are also associated with expansion in productive life years. Verguet et al. (2015) analyze the health effects of price increases in China and conclude that a 50 percent rise in prices would result in 231 million life years gained over 50 years and would have a significant impact among the poor. In contrast, Pichón-Riviere et al. (2014) estimate that tobacco use in Chile would reduce life expectancy by nearly 4.0 years among women and 4.3 years among men. For Russia, Maslennikova et al. (2013) estimate that, if taxes were raised to 70 percent of the retail price, along with other policies, such as banning smoking in public places, 3.7 million tobacco-related deaths would be averted, although this may be a low prediction because secondhand smoking effects were not taken into account. According to the WHO, secondhand smoke is responsible for over 890,000 premature deaths a year worldwide (WHO 2017a). 3 Randomly selected participants living in mid-size towns in Belarus, Hungary, and Russia provided information on smoking habits, alcohol consumption, vital statistics, and cause of death (if applicable) of male relatives (fathers, siblings, and partners). The population attributable risk (PAR) fraction of cancer deaths (ages 35–79) because of smoking, alcohol consumption, or both was estimated between 2001 and 2013. Among 72,190 men, 4,702 died of cancer. 4 This number might be overestimated due to alcohol abuse effect. Some twenty years ago the number of life years lost was estimated as 5-7 years (Gerasimenko, 2001). 5 Goodchild, Nargis, and Tursan d’Espaignet (2018) estimate the economic cost of smoking-attributable diseases at US$354 billion in upper-middle-income countries (purchasing power parity U.S. dollars). 5 Tobacco Taxation Incidence: Evidence from Russia Tobacco taxation has been recognized as one of the most effective tobacco control strategies. In high-income countries, a 10 percent increase in the price of cigarettes is associated with a decrease in the demand for cigarettes of approximately 4 percent (World Bank 1999). In low- and middle-income countries, an equivalent increase is associated with an average 6 percent reduction in cigarette consumption (Chaloupka et al. 2000). Higher taxes have the additional benefits of reducing exposure to secondhand smoke and increasing government revenues. Maslennikova et al. (2013) estimate that a 10 percent rise in price would reduce cigarette consumption among people under 35 by 3 percent and among people over 35 by 1 percent. This may be because price elasticities for tobacco products are higher among young people. Lance et al. (2004) use data from three waves of the Russia Longitudinal Monitoring Survey–Higher School of Economics (RLMS-HSE) (1996, 1998, and 2000) to estimate the demand for cigarettes among men and find that the price elasticity of smoking participation was between –0.106 and –0.050. However, young people (ages 13–19) were found to be much more price sensitive; the total elasticity was –0.345. Additionally, recent decreases in tobacco consumption have occurred in lockstep with increased prices of cigarettes from the pass-through of excise and ad valorem taxes.6 6 Sakharova, Antonov, and Salagay (2017) observe a 25 percent decrease in consumption in 2005–14 that correlates with government action on the tobacco epidemic. 6 // Literature review 7 THE RUSSIAN FEDERATION (RU HAS ONE OF THE HIGHEST SMOKIN PREVALENCE RAT IN THE WORLD, PARTICULARLY AMONG MEN. ACCORDING TO THE GLOBAL ADU 3 MODEL In this paper, the impact of raising tobacco taxes in Russia is estimated using an extended cost-benefit analysis as in other studies (Pichón-Riviere et al. 2014; Verguet et al. 2015). The paper analyzes three factors to estimate how tobacco taxes affect household incomes. First, assuming tobacco consumption does not change, tobacco taxes directly affect household income because the share of household budgets allocated to tobacco purchases increases as the tax increases. Second, household medical expenses decrease as a result of a reduction or widespread cessation in tobacco consumption. Third, households experience a positive income change because of additional years of labor recovered through the extension of life expectancy. The aggregate effect of a tax policy is estimated as follows: Income effect = change in tobacco expenditure (A) + lower medical expenses (B) + rise in income (C) (1) For further details on the methodology used, see annex A; refer also to Fuchs and Meneses (2017a). 9 THE RUSSIAN FEDERATION (RU HAS ONE OF THE HIGHEST SMOKIN PREVALENCE RAT IN THE WORLD, PARTICULARLY AMONG MEN. ACCORDING TO THE GLOBAL ADU 4 DATA AND DESCRIPTIVE STATISTICS Data For the current analysis, we mainly used the data provided by the RLMS-HSE. This is a rich set of data on individuals and households, covering incomes, expenditures, and health status as well as attitudes toward smoking. The RLMS-HSE is an annual survey that allows researchers to construct panels to follow the same individuals over a few years at a time. The latest available wave of the survey when the analysis was conducted was the 2016 round. The information on attitudes toward smoking is available on households and individuals. In the family questionnaire are questions about how much households spend on cigarettes and how many packs were purchased during a recent period. This allows the unit values (individual prices) of cigarettes to be calculated for all the households that were involved in smoking. There are also questions on how much the respondent smokes and how much the respondent spends on cigarettes. Another source of information is cigarette prices in communities. This information is also collected through the survey. Prices for four types of cigarettes are collected in this section of the questionnaire: brands that are domestic, imported, cheaper, or more expensive. However, the variation in prices among households is relatively low. This is why the information is not helpful in the analysis.7 The analysis was run and is presented below by deciles that were defined using per capita expenditures (unless specified otherwise). Smoking prevalence in Russia Despite the gradual decrease in recent years, smoking is still common in Russia (figure 1, panel a). According to RLMS-HSE data, 29 percent of the population ages 16–75 were smoking in 2016. Smoking is three times more popular among men (45 percent) than among women (15 percent). Smoking prevalence among men has been falling over the last decade and has declined by 10 percentage points since 2010, while, among women, prevalence has remained stable. 7 As a robustness check, we tried a few modules in which the prices in communities were used as instruments. However, the results appeared to be statistically unstable. 11 Tobacco Taxation Incidence: Evidence from Russia Smoking is common across the entire expenditure distribution (figure 1, panel b). While there is no specific pattern in smoking among men across deciles, smoking among women is clearly more popular among the more well off population. Smoking in Russia involves mostly filter cigarettes; the share among all cigarettes smoked is between 90 percent among the lower deciles to 100 percent among the richer deciles. Men smoke an average of five or six packs a week, while women smoke an average of four packs a week; these numbers are rather stable across the distribution. Figure 1 – Smoking Prevalence, Russian Federation (ages 16–75) A. OVERTIME B. BY DECILE 60 60 50 50 40 40 30 30 20 20 10 10 0 0 2010 2011 2012 2013 2014 2015 2016 1 2 3 4 5 6 7 8 9 10 both both men men women women C. BY AGE GROUP D. BY EDUCATIONAL ATTAINMENT 60 60 50 50 40 40 30 30 20 20 10 10 0 0 below general above higher 55-64 35-44 16-24 25-34 45-54 65+ secondary secondary general secondary both both men men women women Source: Estimates based on Russia Longitudinal Monitoring Survey–HSE 2010–16. Note: Deciles have been established using per capita household expenditures. 12 // Data and descriptive statistics Tobacco price elasticity by decile Although several models have been tested to estimate elasticities by decile, the pooled cross-sectional model with year fixed effects and demographic controls at the household level is preferred (table 1; see annex B for more on the methodology and the various iterations of the estimation of tobacco price elasticities by decile).8 The estimated average cigarette price elasticity in Russia is −0.52, which is within the estimated elasticities found in the literature (−0.4 and −0.8), as well as those previously estimated for Russia.9 Table 1 – Cigarette Price Elasticities, by Decile PRICE 1 2 3 4 5 6 7 8 9 10 ELASTICITY Lower bound -0.48 -0.41 -0.38 -0.34 -0.32 -0.31 -0.29 -0.26 -0.25 -0.21 Medium -0.68 -0.61 -0.58 -0.54 -0.52 -0.51 -0.49 -0.46 -0.45 -0.41 Upper bound -0.88 -0.81 -0.78 -0.74 -0.72 -0.71 -0.69 -0.66 -0.65 -0.61 Source: Estimates based on Russia Longitudinal Monitoring Survey–HSE 2010–16. Note: Deciles were created using per capita household expenditure. Lower- and upper-bound elasticities show average differ- ences of −0.2 and +0.2, respectively, with the medium-bound elasticity. Demographic controls include area, macroregion, and year fixed effects. Mortality and morbidity Data on mortality, years of life lost, and morbidity have been obtained from the Global Burden of Disease Study. Ischemic heart disease, stomach cancer, and stroke are among the most prevalent diseases among men and women in Russia. In 2016, approximately 243,252 deaths were attributed to tobacco-related diseases, of which nearly 86 percent were men (208,451) (table 2). Similarly, more than 2.5 million cases of tobacco-related disease were reported in Russia the same year (table 3). A total of 5,979,509 years of life lost were estimated for all tobacco-related deaths in 2016 (table 4). 8 To make this paper comparable to the other cases analyzed by the authors in the past (Chile, Ukraine, Moldova, South Africa, Indonesia, Bangladesh and Bosnia Herzegovina) it was decided to use household level data to estimate price elasticities. However, a full replication of the analysis using individual level data is also performed and included in the annex. Although there is a difference in levels, both analyses yield similar and consistent results in terms of trends and incidence. 9 Only partial elasticity of consumption is estimated and used here unless specified otherwise. Using the full elasticity, including the effect on participation, would make the results more precise, but, because of computational difficulties, this step was omitted on the assumption that participation in smoking is less sensitive to relatively small changes in prices. 13 Tobacco Taxation Incidence: Evidence from Russia Table 2 – Tobacco Related Deaths, by Gender and Age-Group, Russia Federation, 2016 WOMEN MEN 25-34 35-54 55-74 75+ TOTAL 25-34 35-54 55-74 75+ TOTAL Total Tobacco- 397 6,549 19,779 8,076 34,801 1,814 36,357 126,200 44,080 208,451 related deaths Bladder cancer 0 8 43 32 83 1 195 1,588 792 2,576 Cervical cancer 3 115 111 23 252 - - - - - Chronic obstructive 2 180 1,239 1,338 2,760 18 1,168 9,072 6,987 17,245 pulmonary disease Colon and rectum 1 55 234 103 392 2 259 1,433 444 2,138 cancer Esophageal 0 31 143 82 256 2 696 3,091 592 4,381 cancer Ischemic heart 192 3,164 9,777 3,533 16,665 1,081 18,878 52,413 17,682 90,055 disease Larynx cancer 0 36 112 45 194 2 645 2,747 534 3,927 Leukemia 0 7 17 5 29 5 230 737 177 1,149 Lip and oral cavity 1 52 138 54 245 4 781 2,252 360 3,397 cancer Liver cancer due 0 2 7 3 12 1 83 339 88 510 to other causes Nasopharynx 0 10 18 4 32 1 91 227 28 347 cancer Stomach cancer 1 66 215 92 374 5 855 3,690 900 5,450 Tracheal, bronchus, and 3 460 1,970 801 3,234 21 4,783 26,023 6,958 37,785 lung cancer Tuberculosis 37 141 43 3 223 231 1,301 775 44 2,350 Stroke 156 2,224 5,712 1,958 10,049 441 6,391 21,814 8,495 37,141 Source: EGBD Results Tool (database), Global Burden of Disease Study 2016, Global Health Data Exchange, Institute for Health Metrics and Evaluation, Seattle, http://ghdx.healthdata.org/gbd-results-tool. 14 // Data and descriptive statistics Table 3 – Tobacco-Related Events, by Gender, 2016 ALL WOMEN MEN Bladder cancer 17,898 4,051 13,847 Cervical cancer 15,718 15,718 0 Chronic obstructive 334,223 83,351 250,873 pulmonary disease Colon and rectum 73,256 39,421 33,835 cancer Esophageal cancer 7,943 1,510 6,433 Ischemic heart disease 1,200,833 651,505 549,328 Larynx cancer 9,221 748 8,473 Leukemia 10,843 5,276 5,567 Lip and oral cavity 11,517 3,944 7,573 cancer Liver cancer due to 1,845 475 1,370 other causes Nasopharynx cancer 845 171 674 Stomach cancer 40,978 18,991 21,987 Tracheal, bronchus, and 53,673 10,624 43,049 lung cancer Tuberculosis 82,910 24,279 58,631 Stroke 673,818 404,503 269,315 Total 2,535,522 1,264,569 1,270,953 Sources: GBD Results Tool (database), Global Burden of Disease Study 2016, Global Health Data Exchange, Institute for Health Metrics and Evaluation, Seattle, http://ghdx.healthdata.org/gbd-results-tool. Note: Based on disease incidence. Incidence is defined as the number of new cases of a given disease during a given period in a specified population. It is also used for the rate at which new events occur in a defined population. It is differentiated from preva- lence, which refers to all cases, new or old, in the population at a given time. Tobacco-related medical costs The total tobacco-related medical expenses in the case of Russia used in this analysis have been calculated using national administrative data. The direct health care costs related to the treatment of tobacco-related diseases include the costs of medical care provided in outpatient facilities, hospitals, and day-care hospitals. It is calculated by disease using the information on the number of cases and the weighted average costs of the treatment for each case. The diseases considered are as follows: • Diabetes • Cardiovascular disease 15 Tobacco Taxation Incidence: Evidence from Russia Table 4 – Years of Life Lost, by Gender, 2016 ALL WOMEN MEN 30-34 120,406 21,587 98,819 35-39 185,642 36,704 148,938 40-44 300,647 52,518 248,129 45-49 415,610 65,885 349,726 50-54 773,506 104,615 668,891 55-59 1,109,687 141,986 967,701 60-64 1,221,584 169,004 1,052,579 65-69 917,030 125,746 791,284 70-74 347,145 47,219 299,926 75-79 416,913 51,640 365,273 80 plus 171,339 29,945 141,395 Total 5,979,509 846,848 5,132,661 Source: GBD Results Tool (database), Global Burden of Disease Study 2016, Global Health Data Exchange, Institute for Health Metrics and Evaluation, Seattle, http://ghdx.healthdata.org/gbd-results-tool. • Respiratory disease • Cancer • Tuberculosis The number of diseases associated with tobacco smoking is calculated through the use of the indicator generally accepted in the available literature on population attributable risk (PAR). The PAR is calculated based on data on smoking prevalence and on the indicator of the relative risk (RR) of disease in smokers vs. nonsmokers. For the purposes of this paper, the RR has been taken from previous studies. The details of the calculations and the sources of information are summarized in annex C. The total direct tobacco-related medical costs in Russia in 2017 is estimated at the level of 418 billion rubles.10 10 Alternatively, as a robustness check, the simulations have been performed using data from a cross-country comparable database. The most complete and standard study estimating the economic cost of smoking in Russia is Goodchild, Nargis, and Tursan d’Espaig- net (2018). The study uses a cost if illness approach to estimate the economic cost of smoking attributable-disease in 152 countries. Annual direct health care costs attributable to tobacco use in Russia in 2012 amounted to 526 billion rubles. 16 // Data and descriptive statistics Baseline descriptive results Table 5 summarizes the most important indicators, including total monthly household expenditures and the share of expenditures on smoked tobacco products in 2016. As of 2016, there was at least one smoker in each of 40 percent of all households. The share was highest among households in deciles 6–7 (an average 46 percent) and lowest in low- income households (32 percent). On average, households spent 0.9 percent of their total income on cigarettes, and lower-income households spent the highest share. For instance, the poorest decile spent 1.3 percent relative to 0.5 percent among the richest. Table 5 – Baseline Descriptive Results, 2016, by Decile INDICATOR 1 2 3 4 5 6 7 8 9 10 Expenditure per capita (Rub., 1,760 2,932 3,754 4,594 5,451 6,553 7,857 9,653 13,109 29,712 monthly) Expenditure per hh (Rub., 6,942 11,821 14,327 16,450 18,697 21,647 28,081 30,709 38,848 81,548 monthly) Prop. of exp. on tobacco products, 1.3 1.1 0.9 0.9 0.9 1.1 0.8 0.8 0.7 0.5 % HH that smoke 32 40 37 39 39 47 45 44 41 40 tobacco, % HH Size 3.9 4.0 3.8 3.6 3.4 3.3 3.6 3.2 3.0 2.8 Area (regional 21 29 29 36 41 43 45 47 54 58 center), % Female, % 52 50 55 54 55 54 54 53 55 56 Age 16-34, % 35 37 37 36 32 38 35 33 34 31 Age 35-54, % 35 31 32 31 32 33 33 36 34 36 Age 55+ 30 32 31 34 35 29 32 31 32 34 Higher education, 10 16 15 19 19 21 23 25 32 38 % Years smoking 25 25 24 24 25 24 25 25 25 25 (for smokers) Source: Estimates based on Russia Longitudinal Monitoring Survey–HSE 2016. Note: Deciles have been established using per capita household expenditure 17 THE RUSSIAN FEDERATION (RU HAS ONE OF THE HIGHEST SMOKIN PREVALENCE RAT IN THE WORLD, PARTICULARLY AMONG MEN. ACCORDING TO THE GLOBAL 5 RESULTS To analyze the distributional effects of an increase in tobacco taxes, we estimate the effect on prices, medical expenditures, and working life years, aggregating these three into a single measure. The price elasticities estimated in table 1, including the lower-and upper-bound elasticities, allow us to understand how the results could change under different assumptions. Tobacco price increase Income changes that arise from an increase in tobacco prices are estimated for each decile based on low , medium-, and upper-bound elasticities. Using the price elasticities and the share of household expenditure on tobacco by decile, we can simulate the effects of an increase in tobacco prices (see annex A, equation A.2). To show the effect of the elasticities on prices, table 6 also includes estimates of a complete pass-through scenario (i.e. assuming a price elasticity equal to zero), whereby the increase in prices is completely transferred to consumers without a reduction in consumption. For instance, if we assume that the prices for tobacco products rose by 25 percent, given the medium-bound elasticity for cigarettes for the bottom decile (−0.68) in table 1 and the proportion of cigarettes expenditures for the bottom decile (1.3 percent) in table 5, the expected increase in household expenditures would be 0.01 percent (table 6). This represents a loss in welfare because consumers would devote a higher share of their incomes to purchasing the same amount of tobacco, thereby reducing the consumption of other goods. These results hold for all the scenarios analyzed. Table 6 - Direct Effect of Price Increase through Taxes (%), by Decile PRICE SHOCK 1 2 3 4 5 6 7 8 9 10 SCENARIO Complete pass- -0.09 -0.08 -0.06 -0.07 -0.07 -0.09 -0.06 -0.06 -0.05 -0.03 through Low-bound -0.03 -0.04 -0.03 -0.04 -0.04 -0.05 -0.04 -0.04 -0.04 -0.02 elasticity Medium elasticity -0.01 -0.02 -0.02 -0.02 -0.02 -0.03 -0.02 -0.03 -0.02 -0.02 Upper-bound 0.01 0.00 0.00 -0.01 -0.01 -0.01 -0.01 -0.01 -0.01 -0.01 elasticity Source: Estimates based on Russia Longitudinal Monitoring Survey–HSE 2016.. Note: The table shows the share of total consumption for each decile. Complete pass-through refers to elasticity equal to zero; consumers pay all the increased prices, and this does not affect the quantity purchased. 19 Tobacco Taxation Incidence: Evidence from Russia Figure 2 – Income Gains: Direct Effect of Tobacco Taxes (Increase in Expenditure because of tobacco taxes), by Decile 0.04 Income Gains (%) 0.02 0.00 -0.02 -0.04 -0.06 -0.08 -0.10 1 2 3 4 5 6 7 8 9 10 Deciles Source: Estimates based on Russia Longitudi- Complete pass through Low-bound elasticity nal Monitoring Survey–HSE 2016. Medium elasticity Upper-bound elasticity Notes: Estimates assume a price shock of 25 percent. Medical expenses Tables 7 and figure 3 report the income effect of a reduction in medical expenses. As noted above, the model assumes that the health effects of tobacco-related diseases will immediately diminish with the reduction in tobacco consumption. Even though this assumption is implausible in the short-term because changes in the effects of tobacco- related diseases take some time to materialize, it provides an upper-bound estimate of the effects of tax increases. The overall results indicate that the reduction in medical expenditures is highly progressive, disproportionately benefiting lower-income groups. This derives from two factors: (1) the higher price elasticity and (2) a lower income base that massively benefits from the reduction in medical costs. Table 7 - Reduction in Medical Costs (%), by Decile PRICE SHOCK 1 2 3 4 5 6 7 8 9 10 SCENARIO Low-bound 1.13 0.71 0.50 0.41 0.34 0.34 0.23 0.18 0.14 0.05 elasticity Medium elasticity 1.60 1.05 0.76 0.65 0.55 0.56 0.40 0.33 0.24 0.10 Upper-bound 2.07 1.39 1.02 0.89 0.76 0.78 0.56 0.47 0.35 0.15 Sources: Estimates based on the Russia Longitudinal Monitoring Survey 2016. Notes: The table reports the share of total consumption for each decile. 20 // Results Figure 3 – Income Gains: Medical Costs of Tobacco Taxes (Reduction in Medical Expenditures), by Decile 2.5 Income Gains (%) 2.0 1.5 1.0 0.5 0.0 1 2 3 4 5 6 7 8 9 10 Source: Estimates based on Russia Longitudinal Deciles Monitoring Survey–HSE 2016. Low-bound elasticity Upper-bound elasticity Notes: Estimates assume a price shock of 25 Medium elasticity percent. Income gains deriving from an increase in working life years We estimate the cost of the working life lost because of tobacco consumption, assuming that the impact of lower tobacco use on health and work-generated income is direct. The 6.0 million years of life lost attributed to tobacco consumption are distributed using the occurrence of mortality profile. For each death, working years lost are divided across deciles proportionately to the number of households that consume tobacco in each income group. The results show that the reduction in tobacco consumption and the expected reduction in work years lost have a positive impact on welfare that represents a transversal income bump among all decile groups (table 8 and figure 4). Table 8 – Years of Working Life Lost (%), by Decile PRICE SHOCK 1 2 3 4 5 6 7 8 9 10 SCENARIO Low-bound 0.35 0.36 0.32 0.32 0.31 0.38 0.32 0.31 0.31 0.27 elasticity Medium elasticity 0.49 0.53 0.49 0.51 0.51 0.63 0.54 0.55 0.55 0.53 Upper-bound 0.64 0.70 0.66 0.70 0.71 0.88 0.76 0.79 0.79 0.79 elasticity Source: Estimates based on the Russia Longitudinal Monitoring Survey–HSE 2016. Note: The table reports the share of total consumption for each decile. Years of life lost have been estimated using all deaths from tobacco-related diseases. 21 Tobacco Taxation Incidence: Evidence from Russia Figure 4 – Income Gains: Production during Years Lost, by Decile 1.0 Income Gains (%) 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 1 2 3 4 5 6 7 8 9 10 Deciles Source: Estimates based on Russia Longitudinal Low-bound elasticity Upper-bound elasticity Monitoring Survey–HSE 2016. Medium elasticity Notes: Estimates assume a price shock of 25 percent. Net effects: total distributional impact In this subsection, we add the previous results to estimate the aggregate effect of an increase in tobacco taxes (see equation 1). The aggregate effect of an increase on tobacco taxes is positive and progressive; in the long run, poorer deciles benefit more than richer ones. The positive effect of reduced medical expenses and years of life gained offset the negative price effect. Under any tobacco price elasticity scenario, the overall effect for cigarettes is always positive and progressive (table 9 and figure 5). Moreover, the benefits are amplified if we compare the lower-bound elasticity with the upper-bound elasticity. Apparently, a population in which medical expenses are high and which is sensitive to tobacco price changes will reduce consumption sufficiently to allow work and health benefits to offset cost increases. This is exactly what happens in Russia. Furthermore, the assumptions in this model do not include other possible policies, such as smoking cessation programs, antismoking advertising, youth outreach, or policies financed through the new tax revenue. Therefore, these results are in line with the literature, showing the important role that taxation plays in lowering tobacco usage. 22 // Results Table 9 - Net Effect on Household Expenditures (%), by Decile PRICE SHOCK 1 2 3 4 5 6 7 8 9 10 SCENARIO Low-bound 1.44 1.03 0.78 0.69 0.61 0.67 0.51 0.45 0.41 0.31 elasticity Medium elasticity 2.08 1.56 1.23 1.14 1.04 1.16 0.91 0.85 0.77 0.62 Upper-bound 2.71 2.09 1.68 1.59 1.47 1.66 1.31 1.25 1.13 0.93 elasticity Source: Estimates based on the Russia Longitudinal Monitoring Survey–HSE 2016. Note: The table reports the share of total consumption for each decile. Figure 5 – Total Income Effect: Direct and Indirect Effects of Tobacco Taxes (Tobacco price increase, medical expenditure, and working years gained), by Decile 3.0 Income Gains (%) 2.5 2.0 1.5 1.0 0.5 0.0 1 2 3 4 5 6 7 8 9 10 Decile Source: Estimates based on Russia Longitudinal Low-bound elasticity Upper-bound elasticity Monitoring Survey–HSE 2016. Medium elasticity Notes: Estimates assume a price shock of 25 percent. 23 THE RUSSIAN FEDERATION (RU HAS ONE OF THE HIGHEST SMOKIN PREVALENCE RAT IN THE WORLD, PARTICULARLY AMONG MEN. ACCORDING TO THE GLOBAL ADU 6 DISCUSSION Despite the wealth of research on the negative effects of tobacco consumption and on the benefits of various public policy mechanisms aimed at reducing tobacco use, questions remain about the progressivity or regressivity that these entail. The implementation of tobacco taxes is considered one of the most effective ways to discourage tobacco use. Nonetheless, this policy has a direct impact on household incomes, especially among low-income households that allocate a larger proportion of their budget to buying smokes. Moreover, the net effect of an increase in tobacco taxes depends on the price elasticity of this product across different segments of the population. The price elasticity determines the magnitude of the income shock and the benefits gained from a decline in tobacco consumption. To assess the net welfare gains from this policy, one must look beyond the direct impact on household income and consider other benefits of lower tobacco consumption, including a reduction in medical costs and an increase in the potential working years associated with good health. Thus, it is critical to justify the maintenance or intensification of the use of tobacco taxes by means of a demonstration of the aggregate monetary gains or losses generated. Moreover, the policy should focus on low-income households that are typically more likely to smoke and, hence, tend to be the most affected by consumption taxes. One of the main motivations for this study is the ability to weigh the main costs and benefits of tobacco taxation to determine if, in the end, the policy is regressive. The results show that, considered by itself, a tobacco price increase through higher taxes generates negative income variations across all groups in the Russian population because overall prices increase. These negative effects are particularly acute in the scenario of lower-bound elasticity, and they are more moderate as elasticity expands in absolute terms. Based on the assumptions behind a more comprehensive approach, including benefits through lower medical expenses and an increase in working years, the overall monetary effect reverses and is positive and progressive among all deciles. The three price elasticity scenarios mimic the short- versus the long-term effects of tobacco taxes. There is evidence that adult smokers will only present small changes in their behavior if prices increase; the lower-bound elasticity would tend to represent this behavior more closely. 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Boisclair. 2007. “The Cost Attributable to Tobacco Use: A Critical Review of the Literature.” Tobacco Free Initiative, World Health Organization, Geneva. Kpodar, K. 2006. “Distributional Effects of Oil Price Changes on Household Expenditures: Evidence from Mali.” IMF Working Paper WP/06/91, International Monetary Fund, Washington, DC. Krasnova, Y. N. 2015. “Влияние табачного дыма на органы дыхания” [“Effects of Tobacco Smoking on the Respiratory System”] [in Russian], Сибирский медицинский журнал [Sibirskij medicinskij žurnal] 137 (6): 11–16, Irkutsk State Medical Academy of Continuing Education, Irkutsk, Russian Federation. Lance, P. M., J. S. Akin, W. H. Dow, and C.-P. Loh. 2004. “Is Cigarette Smoking in Poorer Nations Highly Sensitive to Price? Evidence from Russia and China.” Journal of Health Economics 23 (1): 173–89. Maslennikova, G. Y., R. G. Oganov, S. A. Boytsov, H. Z. Ross, A. T. Huang, A. Near, A. Kotov, I. Berezhnova, and D. 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Graham. 1950. “Tobacco Smoking as a Possible Etiologic Factor in Bronchiogenic Car Cinoma: A Study of Six Hundred and Eighty-Four Proved Cases.” Journal of the American Medical Association 143: 329–36. 28 // References 29 THE RUSSIAN Tobacco Taxation Incidence: Evidence from Russia FEDERATION (RU HAS ONE OF THE HIGHEST SMOKIN PREVALENCE RAT IN THE WORLD, PARTICULARLY AMONG MEN. ACCORDING TO THE GLOBAL ADU 30 // Appendix ANNEXES A. Model This section describes the partial equilibrium approach used to simulate the impact on Annexes Annexes of an increase consumption Annexes in the price of cigarettes. This approach is used to evaluate the first-orderAnnexes A. Model Annexes effects of a change in prices. It relies mainly on household expenditure A. Model A. Model patterns. The focus is on the impacts of a rise in the price of cigarettes because this has Annexes A. 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The in each change decile in (expenditure <,= =( 1 is + ∆P)$1 + presented as for ε= a ∗ eachshare∆P* -1) of ∗ household total expenditure in each decile DEF is averaged Cand presentedby (A.2) as a C share of ∆ Expenditure<,= =( ∆ ( 1 + ∆P 1 + ε<,= )$ =∗ =( GHIJK LMNLOP