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1 Directions in Development Curbing the epidemic Governments and the Economics of Tobacco Control The World Bank Health and Economics: The Evidence Base.

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Presentation on theme: "1 Directions in Development Curbing the epidemic Governments and the Economics of Tobacco Control The World Bank Health and Economics: The Evidence Base."— Presentation transcript:

1 1 Directions in Development Curbing the epidemic Governments and the Economics of Tobacco Control The World Bank Health and Economics: The Evidence Base Tobacco Control in LAC By Ayda A. Yurekli, Ph.D World Bank PAHO/Caribbean Tobacco Control Meeting, Jamaica, 2001

2 2 Global Number of Smokers ( estimate) Source: WHO, 1995 Note: M = Millions MalesFemalesTotal Developed Countries 200 M100 M300 M Developing Countries 700 M100 M800 M 900 M200 M1,100 M World

3 3 Changing Global Burden of Tobacco Pattern Large and growing number of deaths from smoking World: Annual Tobacco deaths (in millions) Developed 2 ~3 Developing ~2 ~7 World Total 4 ~10 u 1 in 2 of long-term smokers killed by their addiction u 1/2 of deaths in middle age (35-69)

4 4 DALYs attributable to Diarrhea, HIV and Tobacco, (baseline scenario) Source: Murray C and Lopez A. The Global Burden of Disease

5 5 Changing Burden of Disease Pattern in Developing Countries, 1990 and 2020

6 6

7 7

8 8 Global Share of the LAC Cigarette Consumption

9 9

10 10 Higher Prevalence Rate in LAC

11 11 Global Youth Tobacco Survey, 1999 Ages 13-15

12 12 Heavy Smokers in Latin America

13 13 Heavier Smokers in Caribbean

14 14 Higher Prevalence Rate Among Health Professionals in LAC

15 15 Policymakers worry that the costs of tobacco control would be high. Revenue loss: likely to have revenue gains a 10% tax increase would raise revenue by 7% Job loss: temporary, minimal and gradual Possible smuggling: crack down on criminal activity, not lower taxes Cost to individuals, especially the poor: partially offset by lower consumption

16 16 Which interventions are effective? Measures to reduce demand Higher cigarette taxes Non-price measures: consumer information, research, cigarette advertising and promotion bans, warning labels and restrictions on public smoking Increased access to nicotine replacement (NRT) and other cessation therapies

17 17 Which interventions are ineffective at reducing consumption? Most measures to reduce supply Prohibition Youth access restrictions Crop substitution Trade restrictions Control of smuggling is the only exception and it is the key supply-side measure

18 18 Taxation is the most effective measure Higher taxes induce quitting and prevent starting A 10% price increase reduces demand by: 4% in high-income countries 8% in low or middle-income countries Young people and the poor are the most price responsive

19 19 Cigarette tax levels are lower in low and middle-income countries Source: Authors calculations

20 As Cigarette Price (Tax) Rises Consumption Falls

21 21 As cigarette price rises, consumption falls South Africa Experience

22 As Cigarette Tax Rises Revenues Increase too

23 Trend in Cigarette Tax Revenues and Tax Rates in Sweden

24 As the Chinese Government Increases Prices, Revenues Increases

25 Tobacco tax revenue is not a significant source of government tax revenue in most developed countries

26 26

27 27

28 Lower Consumption, Higher Revenues

29 High Opportunity Costs

30 30 Smuggling Concerns Smuggling causes revenue loss to governments: Smuggled cigarettes sell at a lower price, making cigarettes more affordable and therefore increasing consumption Smuggling activities provide more opportunities for organized crime networks and may increase the general level of corruption in the country One of the most frightening outcomes of smuggling is the likelihood that children will find it easier than ever to purchase tobacco products,

31 Large Scale Organized Smuggling Avoidance of taxes Public tolerance lack of control presence of organized crime the complicity of the industry

32 Characteristics of Organized Smuggling Tax free cigarettes exported cigarettes diverted from intended destination International brands most popular, well-known Transport system Pass through many owners The presence of criminal organizations Distribution in non-official outlets

33 33 Canadian Government reduced tobacco tax rates dramatically in February 1993

34 34 Sweden decreased cigarette taxes (17%) due to fear of smuggling in 1998

35 Tobacco smuggling tends to rise in line with the degree of corruption Smuggling as a function of transparency index

36 Recommendations to control smuggling Require a license and keep detailed records; Make cigarette exporters post a bond; and Require that unique markings be placed on cigarette packages.

37 37 Summary Tobacco deaths worldwide are large and growing, and shifting rapidly towards developing countries Demand measures, chiefly tax increases, information, and regulation are most effective to reduce consumption Control of smuggling is the major supply-side intervention Tobacco control is cost-effective

38 Types of Tobacco Taxes Excises Specific - based on quantity Ad-Valorem- based on value VAT Customs Duty

39 39 What is the right level of tax? Complex question Depends on various factors, degree to which society wishes to protect children, revenue considerations, etc. Useful yardstick: where comprehensive programs used, tax is at least 2/3 to 4/5 of retail price.

40 40 Choosing the Right Types of Excises Ad Valorem vs. Specific

41 Ad Valorem Excises It has a multiplier effect as part of any increase in the consumer price goes to the government as tax revenue. The multiplier effect creates a disincentive to the manufacturer to improve a products quality. It will give greater protection to domestic producers if the cheaper brands of cigarettes are domestic products and the prestige brands are imported. Determining the value is difficult when taxpayers use abusive transfer prices to reduce their tax liabilities( example: Phillippines). A solution to the valuation problem is to impose the ad valorem cigarette excises, which are collected from the manufacturer or importer, on the maximum retail price that is specified by the manufacturer and printed on the package. Keep pace with inflation better than specific taxes. No guarantee that tax revenue will keep pace with inflation

42 42 Specific Excises Weak tax administration: Specific automaticaly adjusted for inflation should be preferred to ad valorem excises Specific taxes could be adjusted automatically whenever the CPI has increased by more than say 5 percent since the previous adjustment Specific taxes can keep up with inflation if they are automatically adjusted by reference to the consumer price index (CPI) Specific excises are easier to administer Specific taxation requires a precise definition of what constitutes one unit of quantity. Specific excises protect the revenues from price wars or reductions When quality and variety are considered important in a type of product, economic theory points to specific taxation

43 43 Types of Tobacco Taxes in EU

44 44 Cigarette Tax as % of Retail Price for Selected Latin American and the Caribbean Countries, 1999

45 45 Administration of Tobacco Taxation and Revenues Administration: a. Compliance b. Registration and licensing c. Timing of tax liability and tax payment d. Bonding e. Physical controls f. Use of stamps g. Refunds and credits h. Floor stocks tax

46 46 Earmarking tobacco tax revenues Justification of earmarking tax revenues Earmarked tobacco taxes could be used to fund health promotion and disease prevention. Earmarked tobacco taxes promote vertical equity. Earmarking Revenues for Tobacco Farmers: Earmarking revenues for other anti- tobacco activities:

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