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Tobacco taxation: Purpose and Myths. The Role of the WB

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1 Tobacco taxation: Purpose and Myths. The Role of the WB
Montserrat Meiro-Lorenzo The World Bank,

2 Outline Why? What to do? Clear How to do it? Article 6 Key issues
The Word Bank

3 Four Stages of Tobacco Smoking Epidemic
Source: Lopez AD, Collishaw NE, Piha T. A descriptive model of the cigarette epidemic in developed countries. Tobacco Control, 1994; 3:

4 Why tax tobacco? Economist
"Sugar, rum, and tobacco, are commodities which are no where necessaries of life, which are become objects of almost universal consumption, and which are therefore extremely proper subjects of taxation. Adam Smith, An Inquiry into the Nature and Causes of The Wealth of Nations, 1776

5 Why Tax Tobacco? Economic Efficiency
Correct for failures in tobacco product markets Imperfect information Externalities Increased health care costs, lost productivity Increased financial costs related to publicly financed health care used to treat diseases Can also include “internalities” that result from addiction and time inconsistent preferences Other Motives affecting tax structure: To protect domestic industry and employment To keep some brands/products affordable to the poor Chalupka 2012

6 Improve health outcomes
Why Tax tobacco? Health Because high tobacco prices CAN: Reduce the % of people that use tobacco products (prevalence). Reduce the quantity consumed by those that continue to smoke Improve health outcomes People respond to changes in the prices of tobacco products

7 Taxes, Prices; Health: US, 1980-2005

8 People Respond to Prices
10% price increase reduces tobacco use rates by about 4% among the poor and around 8% among the better off. Price-elasticity of demand for cigarettes in LICs and MIC is around -0.6 Poor and young respond more to prices than the better-off and old +10% -4% -8% developed countries developing countries price change consumption change

9 Source: MTF, Tax Burden on Tobacco, 2011, and author’s calculations

10 Taxes, Prices and Tobacco Use
Cigarette Consumption, Morocco, Source: Aloui, 2003

11 Cigarette consumption in SA, 1946 - 2011

12 A very close relationship between cigarette consumption and affordability (r = - 0.98)

13 Cigarette Taxes and Prices Globally

14 Average Price Most Sold Brand, Excise Tax/Pack & Total Share 2010

15 Tobacco Tax: Time to Abolish Myths
Will reduce government revenues. Will destroy jobs / hurt particularly farmers Smuggling (Illicit trade) Difficult to collect and implement Regressive (against poor) WTO, investment bilateral, agreements

16 Will reduce government revenues

17 Philippines losses

18 The South African experience, 1961 - 2011
Big increases in the excise tax have resulted in big increases in tax revenue Between 1993 and 2011 real excise tax increases by 487% and real excise tax revenue increases by 249%

19 Fall in consumption, real excise & industry revenues increased

20 Percentage changes in important variables since 1993
Real excise tax per pack of cigarettes 378% Real net-of-tax price of cigarettes 153% Real retail price 212% Cigarette consumption -33% Per capita cigarette consumption -51% Real excise tax revenue 220% Real industry revenue 69% Smoking prevalence From about 35% to about 22%

21 Destroy jobs, hurt farmers
Tobacco Leaf production Global : 6 million tons Zimbabwe: 0.21 Tons (3.5%) Malawi: 0.13 (2.2 %) Where are the subsidies going? Brazil COP4: Farmers demonstrations

22 Will destroy jobs, will hurt farmers
Indian and Brazil experience from tobacco farmers and bidi roller's opposition to tough demand reduction measures on WHO-FCTC Min of Agriculture initiative engagement with MOH and advocacy to farmers e.g. bamboo as source of energy nets 3000 USD per acre as against 1000 USD rom tobacco Min of Labour and Min of Rural Development schemes on alternative livelihood to farmers and bidi rollers


24 Mechanisms for Illicit trade control
Who? Who are the manufacturers What? What are they manufacturing ciagrrets, chewing and wich tarde marks How much? Manufacturing production For whom? destination of products

25 Smuggling tobacco UK 1990s Tobacco industry 25-30%
UK customs estimated % Taxed cigarettes/lower tax coun.: 9% Illicit hand rolled tobacco: % Main drivers – lack of control of international movement of tax free tobacco, price difference between tax free and taxed, criminal gangs

26 Policy measures 1000 extra customs officials
Additional specialist investigators and intelligence officers National network of X ray scanners Tougher sanctions for those caught with smuggled tobacco Public awareness campaign Prominent duty paid marks on packs of cigarettes and hand-rolling tobacco IN 2000 policy measure


28 EFFECTS Smuggling had risen rapidly from virtually nothing in the mid 1990s to 22% (projected to rise to 40% by 2008) but the major anti smuggling action plan, halted the rise and reduced smuggling to 13%.

29 Price rose 28% real terms Benefit nearly ten times the annual cost

30 Illicit trade control Coast line and expansive borders
Undeclared production Unaccounted for exports Undeclared imports: raw & finished Counterfeited products Under declared tax values Switched declarations

31 Control measures put in place
Licencing controls Production monitoring, raw materials Exports management Bilateral information sharing Track and Tracing solutions Tax stamps Electronic Cargo Tracking System

32 Enhanced tax regime Paper based stamps 4 security levels
Central online ordering, packaging, delivery RT production data: brand, date & time, package quantity, production plant & line Market surveillance: random verification of products in industry & verification officers through login & GPS Tax projections from the production data collected on real time. Accurate tax assess. i) Overt security feature; ii) Semi-cover security feature distributors have device to verify products before acceptance; iii) Covert security feature used by the tax authority (random verification)

33 Automating Cargo Monitoring (Electronic Cargo Tracking)
Electronic Cargo Tracking System ensures cargo exported exits country of export or trucked cargo reaches intended destination before any tax remissions or refunds are granted. Benefits: Increase of up to 30% of duty paid tobacco

34 Control of Supply Chain, Tax Stamps and Other Tracking Technology, and enforcement: The Experience of Kenya and Relevance for SADC Countries. Presented to the World Bank Conference on Economics of Tobacco Control in Southern Africa: The issues of Taxation and Smuggling Gaborone 3-5th June 2012 By Caxton Masudi Ngeywo Kenya Revenue Authority

35 Regressive Taxing the poor

36 World Health Organization
28 March 2017 The Poorest smoke most 60% of the 5.7 billion cigarettes/year are being smoked in developing countries 45 40 35 30 25 20 Smoking prevalence (2004) [%] 15 10 5 Low-income countries Lower-middle Upper-middle-income High-income Income Lowest household income quintiles Highest household income quintiles 36

37 Poor and young respond more to prices
If 2/3 of the money spent on cigarettes in Bangladesh were spent on food instead, it could save more than 10 million people from malnutrition

38 Difficult collect & implement
Taxes already exist Simplify existing administration complex tobacco tax structures: Systems that feature multiple tax tiers for cigarettes; different rates for filtered and unfiltered cigarettes, for different lengths of cigarettes, for ‘premium’ versus ‘regular’ brands.

39 How to Do it? Comprehensive (all tobacco products)
Coherent with countries' tax code Coherent with macroeconomic policy Simple, implementable, easy to monitor Monitored Harmonized within economic regions

40 Guidelines for the implementation of Article 6 of the WHO Framework Convention on Tobacco Control
Selected Issues

41 Ch1: sovereign right of countries to establish own taxation policies
“...Should take into account...– both price elasticity and income elasticity of demand, as well as inflation, to make tobacco products less affordable over time in order to reduce consumption and prevalence.... having regular (automatic) adjustment processes or procedures for periodic revaluation of tobacco tax levels. Parties should implement the simplest and most efficient system that meets their health and fiscal needs, with the fewest exceptions and taking into account their national circumstances. From a budgetary as well as a health point of view...implement specific or mixed excise systems with a minimum specific tax floor, as these systems have considerable advantages over purely ad valorem systems.

42 Which Simplest Tax System?
Effective to reach health objectives Reduced complexity of tax administration Specific system with single rate / tier Ad valorem single tier/ rate with a minimum tax floor Mix system with single ad valorem and specific tax rate/ tier Proposal not simple: a mixed system with a minimum tax floor could be several tiers rates for specific or ad-valorem. There are about 30 countries that have more than one tax rate applicable to a single product (e.g. Cigarettes): challenges for countries: Revenue losses – tax avoidance Very complex system to administer Opportunities for substitution – undermines the public health impact of tax increases

43 Ch2. Industry response tax increase
Industry contributes data for tax policy: Market size, illegal trade, employment levels, tax impact, etc. Reduce industry power: independent sources of information and analysis. Standardize minimum data collection for decision making (international)and increase capacity to analyze Medidas independientes del contrabando, a partir de cálculos de consumo total Numero de agricultores dedicados a la plantación de tabaco Información sobre precios y cantidades producidas Incidencia de impuestos de tabaco

44 Ch 3: different tobacco products similar tax burdens, measurement? avoid negative consequences, such as product substitution or an increase in illicit trade, all tobacco products should be taxed in a comparable way, with a similar tax burden, and should be accompanied by strong policies and measures against illicit trade in tobacco products

45 Tax different products equally
Consumer will substitute “down” to cheaper tobacco products with similar nicotine levels. Taxing that other products with similar nicotine equally will reduce substitution down Health system to investigate nicotine equivalence for tax levels

46 Ch 5: Revenue earmarking
About 100 issues , interest groups asking for earmarking MOF loses its soveraigne mandate to administer revenues Perceived as conflict of interest Hard earmarking ties your hands

47 Ch 6-7: assess/present ‘tax- free/duty-free sales’? Art 15?
Parties should consider prohibiting or restricting the tax- or duty-free sales of tobacco products. They should monitor the extent to which tax- or duty-free products contribute to illicit trade and take the necessary measures if such a link is ascertained.

48 Ch 6-7: assess/present ‘tax-free/duty-free sales’? Art 15?
Use the existing language in Articles 6 and 15 Clearer Coherence

49 Which Tax levels? Level of excise or indirect tax not very indicative per se. 70% ad valorem < than 40% specific & if start at a very low base, no difference for health Establish tobacco use reduction targets per capita adult & child (health gains verifiable) Structure tax levels on the bases of health on objectives, be transparent about it. Open the dialogue on health objectives in tax policy and with authorities Autorización y licenciamiento Track and tracing => complemento y coordinación con el Protocolo

50 Facilitate monitoring of article 6
Harmonize the information collected in tobacco taxes as part of article 6 guidelines Document states that countries that don't have an excise are mainly from the African and South-East Asian Region, they actually come mainly from the Eastern Mediterranean and Western Pacific regions

51 The WB view Total support to FCTC Public health measure
Development issue: micro economic impact, fiscal impact, productivity impact, demographic dividend impact, accelerated aging Need for regional harmonization (health expending equal or above current economic crisis)

52 WB Policy & Actions: Past
Curbing the epidemic (1998) No-investment policy (1999), smoke-free Tobacco economics in developing countries. Analysis at country and regional level, with WHO 2007 strategy for health results Towards a Political economy of tobacco control Chronic NCDs flagship study, Numerous regional and country specific studies on NCDs "dying young", Ukraine studies, and ongoing analysis.

53 WB Policy & Actions: Future
Strengthened capacity to provide tobacco tax advice to countries and make case from the economic point of view Sensitizing our macro and fiscal policy colleagues Entering into partnerships with technical and financing institutions WHO, CDC, TFK, ACS, Research centers Supporting the FCTC secretariat in the context of article 6 and 15

54 World Bank Instruments
Policy dialogue : CAS, PRSP (setting priorities) Technical assistance Economic and sector work (studies) Lending: Investment, Policy

55 HOW TO DO IT? Focus on well-defined targets while addressing risk factors from different angles. Give high-profile leaders a central role in driving initiatives Reinforce accountability of partner institutions Be opportunistic, identify impact on health and optimize impact Identify wins for non stake holders (empower non smokers) Engage relevant sectors according to their mandate, capacity and comparative advantage Ensure that different actors focus on what they do best

56 Lending Lending: Traditional Projects Ukraine SWAPS: Kazakstan
Policy Dialog: DPLS LAC & EAR

57 How to do it? MOH Catalyzers Data collection, epidemiology
Raise awareness of issue Do background work Identify interventions that work Measure impact of policies

58 Role of Civil Society Research, evidence gathering
Advocacy for increased resources for health Watch dog on implementation Monitoring Resource mobilization Community outreach and empowerment

59 Role of Private Sector (non tobacco industry)
Worker protection Lobbying government for harmonizing regulation Health insurance and long term care financing

60 Role of other government agencies
MOF/ economy, Customs, Ministry of Industry and Trade Design tax policy, taking into consideration regional harmonization are agreements enforcement and trade control

61 External organizations
Respond to count request or resources: TA, financing. Independent assessments of barriers to tax increase Support national and international commitment mechanisms, policy conditions international comparisons

62 Cigarette tax and illegal cigarette market, Spain 1991-2008
This shows that when Spain reduced its illegal market (yellow) there were huge gains to the government tax revenue (red). 62



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