The Compensative Effects of Tobacco Leaf Price Changes on Tax Revenue in China

Hailong Cai and Henry Kinnucan

No 46727, 2009 Annual Meeting, January 31-February 3, 2009, Atlanta, Georgia from Southern Agricultural Economics Association

Abstract: Tobacco production in China is influenced by a government-set procurement price for tobacco leaf, and an excise tax on tobacco leaf revenue. This study examines the increase in the procurement price needed to keep tax revenue constant in the face of a 50% reduction in the tax rate. This “compensative effect” is important because reductions in the tax rate are contemplated and tobacco tax revenue is a major source of funding for rural communities. Based on an equilibrium-displacement model of China’s tobacco sector, results suggest the “Compensated Effect Elasticity” (CEE) is between 1.0 and 2.5. This means a 50% cut in the tax rate would necessitate an increase in the procurement price of between 50% and 125%. Sensitivity analysis indicates CEE is most sensitive to the retail demand and input substitution elasticities and least sensitive to oligopoly power and returns to scale.

Keywords: Agricultural; and; Food; Policy (search for similar items in EconPapers)
Pages: 22
Date: 2009
New Economics Papers: this item is included in nep-cna and nep-pbe
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Persistent link: https://EconPapers.repec.org/RePEc:ags:saeana:46727

DOI: 10.22004/ag.econ.46727

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