Tobacco Taxation in China: An Extended Cost-Effectiveness Analysis

Authors: Stéphane Verguet, Cindy Gauvreau , Sujata Mishra, Mary MacLennan, Shane Murphy, Elizabeth Brouwer, Carol Levin, Rachel Nugent, Dean Jamison, Prabhat Jha

Tobacco taxation improves population health and increases government revenues, but has been criticized for being regressive. This paper examines the distributional consequences (across wealth quintiles) of a tax hike on tobacco products in China in terms of both financial and health outcomes. We use methods of extended cost-effectiveness analysis (ECEA), to estimate, across income quintiles, the health benefits, the net change in tax revenues, the net financial consequences for households, and the financial risk protection provided to households, caused by an increase in tobacco price of 50% through excise tax.
Using plausible values for key parameters, including an average price elasticity of demand for tobacco of - 0.4, and considering only the male population, which constitutes the overwhelming majority of smokers in China, a 50% increase in tobacco price through excise tax over fifty years would lead to substantial years of life gained (about a third among the poorest), and substantial additional tax revenues (less than a tenth among the poorest). The increased tax would increase overall household expenditures on tobacco, but decrease these expenditures in the poorer and the poorest, and would provide insurance principally concentrated among the poorest.