Incidence of tobacco excise taxes and revenue generation in the Philippines
Date
2007-03-30
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Abstract
We evaluate tobacco excise taxes m terms of their incidence and capacity to generate revenue. Using income and tobacco expenditure data from five Family Income and Expenditures Surveys 1991 to 2003, we adopt a partial equilibrium analysis to estimate the overall incidence, as well as the incidence in urban and rural areas. We then calculate for the Suits indices to determine the degree of progressivity of the excises. Moreover, to examine the capacity of the excises to generate revenue, we test the assumption in the Ramsey rule which states that the demand for tobacco products is price inelastic. Using the ordinary least squares (OLS) method, we adopt the rational addiction theory to model the demand for tobacco during the period 1990 to 2006. The estimated price elasticities from the rational addiction model are then used to analyze the effect of price responsiveness on tax yields. The results show that the poor, especially in urban areas, are the most heavily hit by the tobacco excises. Further, the taxes hurt the consumers in rural areas more than in urban areas. The OLS estimates appear to support the hypotheses of the rational addiction theory, namely, that present tobacco consumption is affected by both past and future consumption, and that the demand for tobacco becomes more price responsive overtime. Thus, the increasing negative price elasticities of the demand for tobacco seem to adversely affect the capacity of the excises for revenue generation.
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Keywords
Tobacco industry, Tobacco tax, Tobacco revenue, Tobacco economics, Tax and revenue