How Effective Are Taxes in Reducing Tobacco Consumption? Presented at the International Conference on the Social Cost of Smoking August 21-22, 1998 Lausanne, Switzerland by Frank J. Chaloupka University of Illinois at Chicago National Bureau of Economic Research ABSTRACT Over the last three decades, following the publication of the seminal British and American reports on smoking and health, a growing economics literature has examined the role of economic forces in the demand for tobacco products. The most important example of this phenomenon is the rapidly expanding and increasingly sophisticated body of research on the effects of cigarette prices on cigarette smoking. Because excise and other taxes are an important component of price, this literature has played a prominent role in legislative debates about using increased tobacco taxation as a tool for discouraging tobacco use. This paper reviews the evidence from the economics and other relevant literatures on the effects of price on the demand for tobacco products and the impact of tobacco taxes on prices. Finally, a short discussion of alternative rationales for tobacco taxation is provided. Numerous econometric studies using diverse statistical methods applied to a wide variety of data from many countries have examined the impact of prices and taxes on the demands for tobacco products using conventional models of demand that do not account for the addictive nature of cigarette smoking. Many have employed aggregate time-series data for a single geographical unit, while others have employed pooled cross-sectional time-series data. Still, others have used individual level data taken from surveys. The price elasticity estimates from overall cigarette demand from recent studies for economically developed countries fall within the relatively wide range from -0.14 to -1.23, but most fall in the narrower range from 0.3 to -0.5. Some of the most recent studies have examined the effects of price on the demand in the context of an economic model of addiction that explicitly accounts for the tolerance, reinforcement, and withdrawal associated with tobacco use and other addictive behaviors. The key implication of these studies is that the long-run effects of tax and price increases will exceed their short-run effects. Estimates from these recent studies conclude that the long-run effect of price on cigarette demand is about double its short-run effect. In addition, a growing literature examines the differential responses of various population subgroups to changes in the prices of cigarettes and other tobacco products. These studies find strong evidence that subgroups defined by age, race/ethnicity, income, gender, and other factors respond differently to price changes. For example, a growing number of recent studies generally conclude that there is an inverse relationship between price elasticity and age, with smoking among teens much more sensitive to price than smoking among adults. Likewise, a few recent studies indicate that price elasticity is higher in lower income populations, a finding supported by the small but growing research on the demand for tobacco products in developing countries. A small but growing literature examines the substitutability of tobacco products, generally concluding that increases in the relative prices of one tobacco product, while reducing the use of that product, will increase the use of others. Similarly, one recent study finds consistent evidence of compensating behavior on the part of smokers in response to price changes. In addition, several recent studies have examined the relationships between tobacco use and other substance use, generally concluding that increases in cigarette prices reduce not only cigarette smoking, but also lower other substance use. Because of its oligopolistic nature, the effect of increases in taxes on tobacco products on the prices of these products is unclear. There is a growing literature, based on data from the U.S., that suggests that cigarette tax increases are at least fully passed on to smokers in the form of higher prices. Indeed, some have argued that federal tax increases have provided the industry with an opportunity for a coordinated price increase that is well above the amount of the tax increase. Moreover, there is some recent evidence implying that the tobacco industry price discriminates, potentially offsetting the impact of tax increases and other tobacco control measures. Finally, several alternative rationales for tobacco taxation have emerged from the economics and other literatures on the demand for tobacco products. This paper closes with a brief discussion of these rationales based on comparative standards, equity, efficiency, and public health arguments. Overheads (25K) Paper (54K) Back to Top