Working Paper: NBER ID: w16287
Authors: Frank J. Chaloupka IV; Richard Peck; John A. Tauras; Xin Xu; Ayda Yurekli
Abstract: The main purpose of this study is to provide empirical evidence on the effects of the cigarette excise tax structure on three outcomes: cigarette prices, government revenues, and cigarette consumption. We composed cross-sectional time-series data for 21 EU countries from year 1998 to 2007 from various data resources. We provide strong evidence that the price gap between premium and low-priced brands is larger in countries with a greater share of ad valorem tax. A 10-percent raise in the share of ad valorem tax in total excise tax leads to about a 4 to 5 percent increase in the price gap, with a smaller impact in more concentrated markets. Our estimates confirm that greater instability of government tax revenues from cigarette excise taxes can be attributed to greater reliance on the ad valorem tax and such instability increases with the growth of manufacturers' market power. We also find that greater reliance on a specific tax has greater impact on cigarette smoking, but the impact diminishes with the growth of manufacturers' market power.
Keywords: Cigarette Taxation; Ad Valorem Tax; Specific Tax; Cigarette Consumption; Government Revenue
JEL Codes: H21; I18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Share of ad valorem tax in total excise tax (H25) | Price gap between premium and low-priced brands (D49) |
| Greater reliance on ad valorem taxes (H79) | Instability in government revenues from cigarette excise taxes (H27) |
| Market concentration (L11) | Price manipulation by manufacturers (L11) |
| Reliance on specific taxes (H29) | Reduction in overall cigarette consumption (D18) |
| High ad valorem tax environments (H25) | Switching to lower-priced brands (D12) |