According to the pricing mechanism (Figure 1 in the “Cigarette price system and price formulation mechanism”) and tax incidence formula (Equation 1 in the “Cigarettes tax incidence”) , we can calculate 2008 tax incidence, 2009 tax incidence, and expected 2009 tax revenue under different conditions and assumptions. We define the notations in Equation (1) as followings:
Ø A is the former cigarette allocation price before tax adjustment, which was excise tax inclusive while VAT exclusive;
Ø a is the profit margin between allocation price and wholesale price;
Ø b is the profit margin between wholesale price and retail price;
Ø The tax base for cigarettes excise tax at producer level has been increased by 2.6% according to MOF.
Ø Rtvat is the tax rate of VAT;
Ø Rtc&e is tax rate of urban maintenance and construction tax and additional educational fee.
The simulation results are shown in Table 1.
Column “2008” shows the tax incidence in 2008 and the actual tax revenue of tobacco industry in 2008, column “2009 Actual” calculates the actual tax incidence for 2009 assuming that 2009 retail price does not change from 2008 retail price, and column “2009 Sim2” simulates the change of retail price if the 2009 tax adjustment is applied and transferred on to retail price. We find that the actual 2009 tax incidence increases by almost 9% without affecting tobacco consumption and this makes the overall tax revenue increase 58.987 billion RMB in 2009. If the tax adjustment is completely transferred to retail price in 2009, we surprisingly find that the overall cigarette price will drop 4.79% compared to 2008 and the tax incidence increases accordingly by almost 10%. The tax revenue will still increase but with lower magnitude compared to the situation that price does not change. Additionally, according to the inner information by MOF, the 2009 allocation price increases 2.6% compared to 2008. If all other policy remains constant, the 2009 retail price will also increase 2.6% compared to 2008 retail price. Hence we use both -4.79% and 2.6% to simulate changes of consumptions and tax considering the effects of price elasticity by each of the 4 research studies and results are shown in Tables 2-4.
Study 1 analyzes the impacts of tobacco taxation on tobacco consumption. Using data from the 1999-2001 Urban Household Income and Expenditure Survey (UHIES) in China and applying Deaton model, study 1 finds relatively high price elasticities (in absolute terms) of cigarette demand, which is between -0.70 and -0.35. It indicates that if tobacco excise tax increases, the cigarette consumption will drop rapidly and the government revenue from tobacco excise tax will increase significantly.
Study 1 does not consider the addictive nature of smoking, while the results from study 2 are different as it accounts for the addictive nature of cigarette smoking. It finds a significant negative effect of cigarette price on probability of smoking and cigarette consumption. Results from both myopic and rational addiction estimations show that lagged cigarette consumption positively affects current quantity of cigarettes smoked. It also finds significant effects of lead tobacco consumption on current consumption from rational addiction model. Besides, the results also suggest that the long-run elasticity is larger than the short-run elasticity. It implies that a permanent increase in cigarette price reduces more tobacco consumption among more addicted smokers, which provides important policy implications on tobacco control.
Study 3 estimates the price elasticity of the cigarette demand for Chinese adolescents and examines the sensitivity of Chinese youth to cigarette prices. It finds an overall cigarette price elasticity of −0.34 which indicates that increasing cigarette prices through raising the cigarette tax would be an effective way to lower the smoking prevalence among Chinese adolescents.
Study 4 examines the impact of an increase in China’s tobacco tax on government revenue. The result shows that increasing China’s tobacco tax will raise both government revenue and total output, while decreasing employment in the tobacco industry. Two policy simulations are done indicating that a 100% increase of tobacco excise tax will induce an increase of 71.4 billion RMB of government revenue at producer segment of tobacco industry, and 4.11 billion RMB of total output, with a decrease of 13,600 people in employment in tobacco industry. If the price of cigarettes is raised by 1 RMB/pack, the government revenue will increase 94.8 billion RMB, together with a decrease of 18,200 people in employment in tobacco industry.
Table 2 Simulation of New Policy
Table 2 shows the simulated results by study group 1 (Xing and Chen, 2009). They simulate the change of cigarette consumption with different price elasticities. In particular, if the elasticity is -0.4325, which is the estimated elasticity from pooling the data, then cigarette consumption will drop by 4.50 billion packs per year and if the elasticity is -0.8125, then cigarette consumption will drop by 8.46 billion packs.
Table 3 gives the results of study group 3 (Xu, 2009).
Xu (2009) estimates the price elasticity among adolescents as –0.34, a 2.6% increase in price will lead to a 0.42% decrease in youth smoking participation and a 0.47% decrease in the consumption of cigarettes theoretically, a 4.79% decrease in price will lead to a 0.77% increase in youth smoking participation and a 0.86% increase in the consumption of cigarettes.
Table 3 finally uses the price elasticities from study 2 (Gao et al., 2009) and the simulation strategy discussed above to calculate the change of cigarette consumption and tax revenue. And we find that increasing cigarette price not only can reduce cigarette consumption, but also can increase government tax revenue. However, although decreasing cigarette price can also increase government tax revenue, the magnitude is smaller than increasing the price. So from the perspective of both tobacco control and economic concern, raising tobacco tax or cigarette price is a better policy choice
Rong Zheng*
Song Gao†
Central University of Finance and Economics
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Policy Simulation of New Tobacco Excise Tax Adjustment in China
2012-12-22 09:07