1 the economics of tobacco control in jamaica: will the pursuit of public health place a fiscal...
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1
The economics of tobacco control in Jamaica:
Will the pursuit of public health place a fiscal burden on the government?
Presentation to the Public Forum, Jamaica Pegasus Hotel, 15 April 2005
Corne van Walbeek,
University of Cape Town, South Africa
2
Policy tools to curb tobacco use
• Supply-side tools– Discourage production of raw tobacco – Youth access control– Smuggling control
• Demand-side tools– Increased excise taxes– Advertising restrictions– Clean indoor air policies– Health warnings on packaging– Content disclosure– Greater health awareness
3
Increased excise taxes
• Despite addictiveness, demand for cigarettes responds to price changes
• Price elasticity of demand – Developed countries: around -0.4– Developing countries: between -0.4 and -0.8
• Increased excise taxes → increased price
• Real price is important
4
Per capita cigarette consumption and cigarette prices in Jamaica
500
600
700
800
900
1000
1100
1200
1300
1400
1500
30 35 40 45 50 55 60 65 70
Real price of cigarettes (J$, constant 1995 prices)
Pe
r c
ap
ita
cig
are
tte
co
ns
um
pti
on
5
Aggregate cigarette consumption and real cigarette prices in South Africa
0
200
400
600
800
1000
19
60
19
64
19
68
19
72
19
76
19
80
19
84
19
88
19
92
19
96
20
00
20
04
Re
al
pri
ce
pe
r p
ac
k o
f 2
0
( in
co
ns
tan
t 2
00
0 c
en
ts)
0200
4006008001000
120014001600
18002000
Cig
are
tte
co
ns
um
pti
on
(m
illi
on
s o
f p
ac
ks
)
Real price of cigarettes Consumption of cigarettes
6
Advertising restrictions
• Industry position“Cigarettes are in mature phase of product life cycle. We advertise to smoking adults to encourage them to switch to our products. We don’t target non-smokers and youth…”
• Tobacco control position– Advertising enhances social acceptability of smoking
– Advertising is inherently misleading: it glamorises a potentially deadly habit
– If advertising was so ineffective, why do monopolists advertise so aggressively?
•
7
Advertising restrictions (cont.)
• The global empirical evidence– Econometric evidence not conclusive either way– Partial bans are less effective than total bans– Effect of total advertising ban: about 5 % reduction in
consumption
• The Jamaican experience– Cigarettes are advertised less than in most other
countries– Local peculiarity that most cigarettes are sold as
single sticks– Impact of advertising ban is likely to be limited
8
Clean indoor air policies
• Rationale: protecting non-smokers from ETS
• Industry is strongly opposed to this policy– “Cater for the needs of both smokers and non-smokers”
• Little published empirical evidence on its impact on cigarette consumption
• Main benefits:– Denormalises smoking– Transfers property rights to non-smokers
9
The price-consumption relationship in Jamaica
0
50
100
150
200
2501
97
4
19
77
19
80
19
83
19
86
19
89
19
92
19
95
19
98
20
01
20
04
Off
icia
l p
ric
e o
f 1
00
cig
are
tte
s (
J$
, c
on
sta
nt
19
95
pri
ce
s)
0
400
800
1200
1600
2000
Co
ns
um
pti
on
of
cig
are
tte
s (
mil
lio
ns
of
sti
ck
s)
Official price of 100 cigarettes (J$, constant 1995 prices)
Consumption of cigarettes (millions of sticks)
10
Current taxation structure on Jamaican
cigarettes (per 100 cigarettes)
Before tax adjustments
After tax adjustments
Base value 375.00 375.00
SGT (specific) 128.61 192.00
SGT (ad valorem) 48.92 0.00
Subtotal 1 552.53 567.00
Excise tax (23%) 127.08 130.41
Subtotal 2 679.61 697.41
GCT (15 %/16.5 %) 101.94 115.07
Tax inclusive price 781.56 812.48
Tax amount 406.56 437.48
Tax burden (Tax/Tax-inclusive price) 52.0 53.9
11
Estimating the demand for cigarettes in Jamaica
• The focus is on the magnitude of price elasticity of demand (εp)
• With current data εp cannot be accurately estimated BUT it is statistically significant in practically all specifications
• Demand for cigarettes is price inelastic
• Implication: A price increase results in a less than proportional decrease in quantity consumed
12
Increasing the excise tax on cigarettes
• Price elasticity of demand has major impact on effectiveness of excise tax to (1) reduce cigarette consumption
(2) raise government revenue
• Assumptions:– 2003 base for cigarette price and consumption– Real industry price does not change because of tax
increase– 10 per cent increase in real excise tax
13
Impact of a 10 per cent increase in cigarette tax, given different price elasticities of demand
Price elasticity % change in consumption % change in government revenue
0.0 0.00 10.00
-0.1 -0.52 9.43
-0.2 -1.04 8.86
-0.3 -1.56 8.28
-0.4 -2.08 7.71
-0.5 -2.60 7.14
-0.6 -3.12 6.57
-0.7 -3.64 6.00
-0.8 -4.16 5.42
-0.9 -4.68 4.85
-1.0 -5.20 4.28
-1.1 -5.72 3.71
-1.2 -6.24 3.14
-1.3 -6.76 2.56
14
Implications
• For any reasonable value for εp, an increase in the excise tax results in– a decrease in cigarette consumption– an increase in government revenue
• There is no “trade-off” between the interests of the Ministry of Health and the Ministry of Finance
• At current tax levels, there is significant room for increasing the excise tax on cigarettes
15
Is there a ceiling for the tax rate?
• International perspective– Minimum EU tax incidence: 57 % of retail price– UK and Scandinavia: more than 75 %– South Africa: 50 % (from 32 % in 1993)
• Impact of raising tax to 57 % of retail price (assuming real industry price unchanged and εp = -0.5):– Real tax per pack increases by 22 %– Real price increases by 12 %– Consumption decreases by 6 %– Real government revenue increases by 15 %
16
The potential to increase taxes on cigarettes in Jamaica (with εp =-0.5)
-30
-20
-10
0
10
20
30
40
50
60
45
47
49
51
53
55
57
59
61
63
65
67
69
71
73
75
77
79
Total tax burden on cigarettes (tax as percentage of average retail price)
Pe
rce
nta
ge
ch
an
ge
in
go
ve
rnm
en
t re
ve
nu
e
fro
m 2
00
4 l
ev
els
Impact of yesterday’s tax increase
The starting point
Minimum EU tax
17
Conclusion
• Tobacco control is an important public health concern
• The best tobacco control tool is an increase in the excise tax
• For both Ministries of Health and Finance it is a WIN-WIN strategy
• The benefits of a tobacco control strategy are real and tangible
18
Back-up slides
19
Real excise tax and real excise revenue in South Africa
0
50
100
150
200
250
300
350
19
61
19
65
19
69
19
73
19
77
19
81
19
85
19
89
19
93
19
97
20
01
Re
al e
xc
ise
ra
te
(in
co
ns
tan
t 2
00
0 c
en
ts)
0
1000
2000
3000
4000
5000
Re
al e
xc
ise
re
ve
nu
e
(R m
illio
n,
20
00
pri
ce
s)
Real excise rate Real excise revenue
20
Industry response to the rapid excise tax increases in South Africa
0
100
200
300
400
500
600
700
800
900
1000
19
61
19
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19
65
19
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19
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20
01
20
03
Ce
nts
/pac
k (c
on
stan
t 20
00 p
rice
s)
Industry price Excise tax Sales tax (GST/VAT)
21
Cigarette consumption, excise tax revenue and industry revenue in South Africa
0
1000
2000
3000
4000
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70001
96
1
19
64
19
67
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19
73
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85
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19
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20
00
20
03
R m
illio
n, c
on
sta
nt
20
00
p
ric
es
0
500
1000
1500
2000
Cig
are
tte
co
ns
um
pti
on
(m
illio
ns
of
pa
ck
s)
Real government excise revenue (R million, constant 2000 prices)
Real Industry revenue (R million, constant 2000 prices)
Consumption of cigarettes (million packs)
22
The latest increase in recommended price of pack of Craven “A”
• Previous recommended retail price = J$ 180
• New recommended retail price = J$ 220
• Increase = J$ 40
• Tax increases per pack– SCT: J$ 13.04 – Excise tax: J$ 3.00– GCT: J$ 2.41– GCT (increased rate) J$ 2.09– Total tax increase: J$ 20.54
• Increase in profits per pack: J$ 19.46
23
Cigarettes’ burden on the expenditure patterns of households• Per capita consumption of cigarettes = 502 cigarettes
per year (2003 figures)
• Of every six adults, one smoked and five did not
• Average consumption of smokers = 3016 cigarettes per year
• Average expenditure on cigarettes = J$ 30 000 per smoker
• Per capita GDP = J$ 210 000 for adults (approx.) in 2003
• On average, smokers spent 14.3 per cent of their gross income on cigarettes