Inequality-Reducing Effects of Tobacco Tax Increase: Accounting for Behavioral Response of Low-, Middle-, and High-Income Households in Serbia

Marko Vladisavljevic, Jovan Zubović, Mihajlo Đukić and Olivera Jovanović
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Mihajlo Đukić: Institute of Economic Sciences, 11000 Belgrade, Serbia
Olivera Jovanović: Institute of Economic Sciences, 11000 Belgrade, Serbia

IJERPH, 2021, vol. 18, issue 18, 1-19

Abstract: While previous research has indicated that increasing tobacco excises is a crucial instrument for lowering tobacco demand, this policy has been criticized for its alleged regressive impact on the poor. However, this critique does not take into account the behavioral response, i.e., decrease in consumption that occurs after excises and prices increase. In this paper, we examine the effect of cigarettes’ price increase on tobacco consumption, household expenditures, and tax burdens in three income groups and provide empirical arguments on the regressivity/progressivity effects of tobacco tax increase. Estimated elasticities indicate that all groups decrease their cigarettes demand with increasing prices, with demand decrease stronger for low- than for middle- and high-income households. Results further suggest that increasing tobacco excises (1) decreases tobacco expenditure of low-income households, which increases their productive consumption, such as on food, clothes, etc., and (2) redistributes the tobacco tax burden from low- to high-income households. Therefore, excise increase policies do not have an adverse effect on the position of the low-income households; on the contrary, they lower their cigarettes expenditure and their tax burden, while lower cigarettes consumption has an additional, positive effect on their health, which attenuates future inequalities.

Keywords: tobacco excises; price elasticity; tax progressivity; inequality; fiscal revenues (search for similar items in EconPapers)
JEL-codes: I I1 I3 Q Q5 (search for similar items in EconPapers)
Date: 2021
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