Coherent Identifier About this item: 20.500.12592/msr312

A taxing dilemma : Assessing the impact of tax and price changes on the tobacco market




This Commentary analyzes the impact of tax and price changes on the composition of the cigarette market in the context of a demand-driven analytical model, in which smokers shift between legal and illegal products to a significant degree. [...] To this end, we The responses of smokers to tax changes, in terms simulate the effects of reducing tobacco taxes on of consumption and use of the illegal product, are consumption levels, on government tax revenues simulated in a simple model described below.13 and on the size of the illegal cigarette market. [...] The Results: Consumption and Scenario 1: A Decrease in Taxes on the Legal Product Size of the Illegal M arket under Refor ms The first experiment (see Table 1) is to reduce the cigarette tax component by one dollar from $4.50 to Given the foregoing, the base case results appear in $3.50. [...] Evidently, From the government’s perspective, the cost of if the implicit price were to increase as a result of the tax decline is the amount of tax revenue lost increased police or legal resources being directed and, from a public policy standpoint, the increase to the problem, additional social costs would be in the quantity of cigarettes being consumed. [...] A final scenario involves changing the tax system Regulation of the Illegal Product in such a way that the price of the discount product The second scenario involves boosting the price falls but the price of the premium product remains of the illegal product by $1 through an intensified unchanged (See Table 4).



health politics economics economy taxation tax revenue prices smoking smuggling demand price index tax taxes tobacco smoking tobacco use price cigarette cigarettes smokers price elasticity of demand tobacco taxes smuggled taxation of articles of consumption own price elasticity of demand