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The Welfare and Distributional Effects of Increasing Taxes on Tobacco in Vietnam (English)

This paper assesses the welfare and distributional effects of raising taxes on tobaccoin Vietnam. Tobacco taxes are recognized as effective policy tools to reduce tobaccoconsumption and to improve health outcomes. However, policy makers often hesitateto use them because of claims of their potentially regressive effects. According to thoseclaims, poorer households are particularly hurt by tobacco tax policies, as cigarettepurchases represent a larger share of their budgets relative to higher-income smokers.The paper argues that the claims on the regressive effects of tobacco tax policies arebased on naive, shortsighted, and incorrect estimations. Tobacco-related illnessesdamage health outcomes and the quality of the lives of smokers and their families, whilethey also cost billions of dollars in medical expenditures and losses in human capital andproductivity every year. Tobacco consumption imposes heavy economic burdens onhouseholds and governments, in addition to its well-known negative health and socialimpacts. Raising taxes on cigarettes dissuades consumption, hence improving healthoutcomes, adverting premature deaths, and reducing direct and indirect economic costs.The analysis applies the Extended Cost Benefit Analysis (ECBA) methodology to simulateempirically the costs, as well as the benefits of increasing the prices on cigarettes onthe welfare of Vietnamese households. Following a well-established body of literature,the ECBA acknowledges that there may be short-term direct negative effects of raisingprices on tobacco, as smokers can struggle to continue to purchase tobacco with theirunchanged household budgets. However, the model also incorporates two of the mainbenefits of reducing tobacco consumption by increasing taxes: (a) the reduction insmoking-related medical expenses borne by households and (b) the additional incomesthat households can earn by preventing years of productive life lost due to smoking attributablepremature deaths. A critical contribution of the ECBA is to incorporate decile-specific price elasticities of demand for cigarettes, to quantify the behavioral responses or sensitivity of smokers in different income groups to changes in cigarette prices. To the knowledge of the authors, this is the first available empirical exercise to estimate price elasticities by income decile in Vietnam. Consistent with the literature and with empirical findings in other countries, the price elasticities of demand for cigarettes are larger for lower-income households. Lower income smokers are likely to reduce their tobacco consumption more drastically, when faced with a price increase. The ultimate distributional effect on welfare of the increasein the price of cigarettes due to tax increases will then depend on assessing the potentialbenefits against the short-term costs.

Details

  • Author

    Fuchs Tarlovsky,Alan, Gonzalez Icaza,Maria Fernanda

  • Document Date

    2019/06/01

  • Document Type

    Working Paper

  • Report Number

    138316

  • Volume No

    1

  • Total Volume(s)

    1

  • Country

    World,

  • Region

    The World Region,

  • Disclosure Date

    2019/06/25

  • Disclosure Status

    Disclosed

  • Doc Name

    The Welfare and Distributional Effects of Increasing Taxes on Tobacco in Vietnam

  • Keywords

    Poverty and Equity; price elasticity of demand; Chronic Obstructive Pulmonary Disease; tobacco consumption; Poverty Reduction and Equity; real per capita income; inpatient and outpatient care; leading cause of death; tobacco product; price shock; medical expense; household expenditure data; price of cigarette; tax on cigarette; basic descriptive statistic; effects of tobacco; consumption of tobacco; parameters in equation; household survey data; reducing tobacco consumption; ischemic heart disease; health care expenditure; indirect economic cost; direct negative effect; cost of illness; purchasing power parity; ad valorem system; effective tax rate; average tax rate; national health care; gross domestic product; share of income; net welfare gain; implications for policy; household disposable income; value added tax; public sector finance; high tax burden; coronary artery disease; tobacco control policy; impact on poverty; description of data; introduction of tax; household expenditure survey; Poverty & Inequality; premature death; price change; household budget; household income; tobacco tax; Tobacco Taxation; cigarette price; tobacco purchases; retail price; literature review; health outcome; smoking prevalence; average welfare; negative shock; income effect; policy scenario; lower-income household; tobacco prices; behavioral response; productivity loss; health effect; tax increase; total tax; medical cost; welfare effect; tobacco expenditures; cigarette tax; data limitation; secondhand smoke; poor household; adult male; lung cancer; tax policy; excise tax; vulnerable household; welfare impact; premature mortality; empirical study; income change; human capital; tobacco-control policy; cigarette consumption; smoking-attributable death; cigarette smoker; tax system; high elasticity; Health cost; previous work; empirical findings; income decile; household smoke; retail sale; household welfare; household consumption; positive income; medical expenditure; Fiscal policies; fiscal policy; cigarette smoking; rural area; consumption base; budget price; causal impact; active smoking; international good; consumption purchase; purchase price; tobacco manufacturers; tax break; raw material; import price; import tax; medical consumption; income reporting; price effect; consumption aggregate; household use; price quantity; household analysis; price decline; relative income; higher-income countries; welfare improvement; addictive properties; population group; large consumer; empirical estimation; demand system; price value; digestive tract; peer effects; noncommunicable diseases; empirical estimate; young people; middle-income household; increased morbidity; spatial variation; price variation; individual data; medical bill; public budget; collected information; insurance sector; tobacco tobacco; elasticity impact; taxation policy; income inequality; rural setting; net effect; benefit analysis; tax rise; welfare change; average price; specific taxes; patient expenditure; incidence analysis; financial saving; young smoker; financial outcome; medical treatment; quit rate; conceptual framework; adult man; net cost; chewing tobacco; labor productivity; intrinsic value; human life; welfare indicator; middle age; adult female; empirical exercise; international recommendation; high share; household earning; fiscal incidence; improved health; simulation result; male smokers; research agenda; health program; tax revenue; increase productivity; robustness check; policy tool; Fiscal Reform; mass media; public space; development policy; smoke-free laws; prevalence rate; social impact; open access; domestic tobacco

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Citation

Fuchs Tarlovsky,Alan Gonzalez Icaza,Maria Fernanda

The Welfare and Distributional Effects of Increasing Taxes on Tobacco in Vietnam (English). WBG Global Tobacco Control Program Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/758391561477648302/The-Welfare-and-Distributional-Effects-of-Increasing-Taxes-on-Tobacco-in-Vietnam