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A Taxing Dilemma: Assessing the Impact of Tax and Price Changes on the Tobacco Market

Author

Listed:
  • Ian Irvine

    (Concordia University)

  • William Sims

    (Concordia University)

Abstract

Sales of contraband cigarettes in Canada constitute a sizable component of the tobacco market. This illegal trade is associated with a loss in tax revenue and an array of illicit activities that involve gangs and organized crime. Various policy responses have been called for to counter this state of affairs. Increased policing and controls have resulted in the market share of the illegal product declining significantly to about 20 percent in 2010 from about one-third two years earlier. In addition to allocating more resources in order to control the problem, governments have been urged to lower tobacco taxes in the belief that lower relative prices for the legal product will induce smokers to switch in significant numbers away from the illegal supply source, perhaps also increasing tax revenues. This report 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.

Suggested Citation

  • Ian Irvine & William Sims, 2012. "A Taxing Dilemma: Assessing the Impact of Tax and Price Changes on the Tobacco Market," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 350, May.
    • Handle: RePEc:cdh:commen:350
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    References listed on IDEAS

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    More about this item

    Keywords

    Social Policy; Health Policy; Canada; contraband cigarettes; tobacco taxes;
    All these keywords.

    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents

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