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Increasing Cigarette Taxes is Unfair to the Poor? Evidence from Argentina

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  • Martin Gonzalez-Rozada

Abstract

Raising cigarette taxes is an important public policy to reduce the use of tobacco. The appeal of increasing cigarette taxes is obvious. Since smoking is bad for one’s health and for that of others as well, increasing prices, via taxes, will induce people to quit or cut back smoking improving their health. However, increasing cigarette taxes could also have bad consequences: they can be regressive. Increasing taxes could result in poor people paying a higher percentage of their income in taxes than do the rich. How much the increment in taxes reduces consumption and if it’s regressive are empirical questions. This paper investigates those issues for Argentina estimating total demand price elasticity for the whole sample and by income groups and then simulating an increase in cigarette taxes. The main results are, (1) total demand price elasticity estimation is around -0.28 implying that increasing prices by 10 percent, via taxes, induce a reduction of consumption of about 2.8 percent; (2) demand price elasticity estimations by income groups suggest that richer individuals are more price sensitive, in absolute value, than poorer ones with respect to consumption but they are less price sensitive with respect to prevalence; (3) increasing taxes on tobacco consumption is unfair to the poor since their welfare loss, measured by the change in consumer surplus, is 61 percent larger than the loss experienced by the richer individuals in the sample; (4) overall, the main policy recommendation is that the increment in taxes should be complemented with public health policies targeted towards the poor.

Suggested Citation

  • Martin Gonzalez-Rozada, 2019. "Increasing Cigarette Taxes is Unfair to the Poor? Evidence from Argentina," Department of Economics Working Papers 2019_01, Universidad Torcuato Di Tella.
    • Handle: RePEc:udt:wpecon:2019_01
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    References listed on IDEAS

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    More about this item

    Keywords

    Tobacco taxes; consumption of cigarettes; demand price elasticity of cigarettes consumption; regresivity.;
    All these keywords.

    JEL classification:

    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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