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Pricing and Taxation of Tobacco Products
in BangladeshFindings from Wave 1 (2009) and Wave 2 (2010)
of the ITC Bangladesh Survey
May 11, 2011 Nigar Nargis, Ummul Hasanath Ruthbah, aKM Ghulam Hussain, and SM ashiquzzaman
University of Dhaka, Bangladesh
Geoffrey T. Fong University of Waterloo and
Ontario Institute for Cancer Research, Canada
Iftekharul Huq East West University, Bangladesh
Suggested Citation: Nargis, N., Ruthbah, U. H., Hussain, A. K. M. Ghulam, Ashiquzzaman, S. M., Fong, G. T., and Huq, I. (May 2011). Pricing and Taxation of Tobacco Products in Bangladesh: Findings from Wave 1 (2009) and Wave 2 (2010) of the ITC Bangladesh Survey. ITC Project Working Paper Series. University of Waterloo, Waterloo, Ontario, Canada.
The International Tobacco Control Policy Evaluation ProjectITC PRojeCT WoRKING PaPeR SeRIeS
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PricingandTaxationofTobaccoProductsinBangladesh:FindingsfromWave1(2009)andWave2(2010)oftheITCBangladeshSurveyNigarNargis1,UmmulHasanathRuthbah1,AKMGhulamHussain1,SMAshiquzzaman1,GeoffreyT.Fong2,3,andIftekharulHuq4
1DepartmentofEconomics,UniversityofDhaka,Bangladesh,2DepartmentofPsychology,UniversityofWaterloo,Canada,3OntarioInstituteforCancerResearch,Canada,4DepartmentofEconomics,EastWestUniversity,Bangladesh
IntroductionIncreasingtaxesandpricesisrecognizedworldwideasthesinglemostcost‐effectivemeasureoftobaccocontrolandacriticalcomponentofacomprehensivetobaccocontrolstrategy.Article6oftheWHOFrameworkConventiononTobaccoControl(FCTC)obligatescountriesthathaveratifiedthetreatytoadoptpricingandtaxationmeasuresinordertoreducetobaccoconsumption.
Whiletheurgencyoftobaccocontroliswellacceptedworldwide,theuseoftaxationoftobaccoproductsasameanstocontroltobaccouseissubjecttodebatefrompolitical,economic,andsocialpointsofview.Suchadebatearisesfromthefactthatapolicychangeintendedforbenefittingsomepeopleoftendoesnotcomewithoutcost.Ontheonehand,increasedtaxesontobaccocanyieldsignificanthealthbenefittoitsusersbycuttingdowntobaccoconsumption.Ontheotherhand,shrinkingoftobaccocultivationandmanufacturingsectorfromreduceddemandfortobaccousemayresultinlossofemploymentinthissector.Fromasocialplanner’spointofview,thisisadilemmaofemployingtobaccotaxes.Thesimpledecisionruleisthattobaccotaxesaretoberaisedaslongasthenetgain,thatisthehealthbenefitlesstheemploymentcost,ispositive.TheWHO2004‐05studyonthecostoftobacco‐relatedillnessesshowedthatthisisindeedthecaseinBangladesh.Tobaccousagecausedannuallyabout57,000prematuredeathsandabout400,000casesofdisabilityofadults30yearsandolderandimposednetcostof26.1billionTakain2004,whichwasequivalentto1%oftheGDPofthatyear.1
1 World Health Organization. Impact of Tobacco-Related Illnesses in Bangladesh. World Health Organization, South East Asia Region, New Delhi, India, 2007.
2
ThefirstwaveoftheITCBangladeshSurvey,conductedin2009,showsthatoverallsmokingprevalenceincreasedfrom20.9%in2004‐05to22.0%in2009,2with42.0%ofmales(20.2million)and1.3%offemales(0.6million)inBangladeshsmokingsomeformoftobacco.Thismeansthat,comparedto2004‐05,therewere2.5millionmoresmokersinBangladeshin2009.
Theincreaseinsmokelesstobaccouseamongmenandwomensince2004‐05isalsoalarming.TheWHOstudyestimatedthat14.8%ofmenand24.4%ofwomenweresmokelesstobaccousers.Butthe2009ITCBangladeshSurveyshowedthatnow27.6%ofmenand32.0%ofwomenaresmokelesstobaccousers.
Overall,thepercentageofBangladeshiswhouseanyformoftobacco(smoked,smokeless,orboth),increasedfrom36.8%in2004‐05to43.2%in2009.Thismeansthatcomparedto2004‐05,therearenow8.7millionmoretobaccousersinBangladesh.Ofthem,4.8millionaremenand3.9millionarewomen.By2009,approximately25.7millionmenand15.3millionwomenusedsomeformoftobaccoinBangladesh.Theenormousriseintobaccouseinthecountryportendsthegrowingspectreoftobacco‐causeddeathanddisabilityfarabovethefiguresestimatedin2004‐05.
Thegeneralmessageisclear:Bangladeshmustengagemoreurgentlyandforcefullyintobaccocontrolefforts.FCTCpoliciessuchasgraphicwarninglabelsandcomprehensivesmoke‐freelawshavenotbeenimplementedinBangladesh.InMay2011,theITCProjectissuedreportspresentingfindingsfromtwowavesoftheITCBangladeshSurveyontheverypooranddecliningeffectivenessofwarninglabels3andofthecontinuingveryhighlevelsoftobaccosmokeinpublicvenues,duetotheabsenceofmeaningfulsmoke‐freelaws.4ThethirdpolicydomaininwhichBangladeshmustactwithstrengthisintaxationandprice,whichisrecognizedasthemostimportantpolicydomainforreducingtobaccouse.
Inthispaper,wepresentthefindingsfromtheInternationalTobaccoControl(ITC)PolicyEvaluationSurveysandEnumerationconductedinBangladeshin2009and2010,whichprovideoverwhelmingevidenceoftheneedforraisingtobaccotaxesinBangladesh.TheresultsshowthataveragecigaretteandbidiconsumptioninBangladeshremainedunabatedbetween2009and2010,inresponsetothemoderatetaxchangesonthesetwoproducts.Theestimatesofpriceelasticityofdemandconfirmthatcigaretteandbidiconsumptioncouldbesignificantlyreducedbyincreasingtaxesontheseproducts.
2 ITC Project. ITC Bangladesh National Report. University of Waterloo, Waterloo, Ontario, Canada; University of Dhaka, Bangladesh, April 2010. 3 ITC Project. ITC Bangladesh Report on Tobacco Warning Labels. University of Waterloo, Ontario, Canada, and University of Dhaka, Bangladesh, May 2011. 4 ITC Project. ITC Bangladesh Report on Smoke-Free Policies. University of Waterloo, Ontario, Canada, and University of Dhaka, Bangladesh, May 2011.
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ITCBangladeshSurveyData
TheITCBangladeshProjectwascreatedtorigorouslyevaluatethepsychosocial,behavioural,economic,andpublichealtheffectsoftobaccocontrollegislationinBangladesh,usingmethodsthattheITCProjecthasemployedin19othercountriesinhabitedbyover50%oftheworld’spopulation,60%oftheworld’ssmokers,and70%oftheworld’stobaccousers(seewww.itcproject.org).TheoverallobjectiveoftheITCProjectistoprovideanevidencebasetoguidepoliciesenactedundertheFrameworkConventiononTobaccoControl(FCTC)andtosystematicallyevaluatetheeffectivenessoftheselegislativeefforts.
TheITCBangladeshSurveyisaface‐to‐facesurveyconductedbytrainedinterviewersfromtheBureauofEconomicResearch(BER)attheUniversityofDhaka,Bangladesh,incollaborationwiththeITCProjectattheUniversityofWaterlooinCanada.ThisprojectisfundedforthreesurveywavesbytheInternationalDevelopmentResearchCentre(IDRC),CanadawithadditionalfundingfromtheCanadianInstitutesofHealthResearch(CIHR).ThesurveyprotocolwasapprovedbytheEthicalReviewCommitteesoftheBangladeshMedicalResearchCouncilandbytheOfficeofResearchEthics,UniversityofWaterloo.
TheanalysesreportedinthispaperarebasedondatacollectedinWaves1and2ofthesurveyconductedinFebruarytoMay2009andMarchtoJune2010,respectively.TheWave1Surveyconsistedofanationallyrepresentativesampleof2,510adultsmokersand2,116adultnon‐smokersaged15yearsandolder.Theserespondentsformacohort,whowerere‐contactedtoanswerfollow‐upsurveysin2010andwillbere‐contactedin2011forthethirdwaveoftheITCBangladeshSurvey.
TheITCBangladeshWave1Surveyisanationallyrepresentativeprobabilitysampleoftobaccousersandnon‐usersselectedthroughamulti‐stageclusteredsamplingdesign(samplingwithprobabilityproportionaltopopulationsizeatthelevelsofdistrict,upazila/thana,andvillage/ward).Atotalof94,485adultsaged15andolderfrom31,689householdswereenumeratedtoestablishanaccuratesamplingframefromwhichsurveyparticipantswouldbedrawn.FortheNationalsample,23districtsoutofthe64districtscoveringBangladeshwereselected,20ofthemusingprobabilityproportionaltopopulationsize.Onedistrict,Satkhira,wasselectedtocoveronelandportthatisusedforcross‐bordertradeoftobaccoproducts.Twootherdistricts,NetrokonaandRangamati,wereselectedpurposivelytosurveythetribalcommunitiesofGaroandChakma.Atotalof40upazilasfromthe23districts,and2villagesfromeachupazilawereselected,againwithprobabilityproportionaltosize.Thus,atotalof80villages/wardswereselectedfortheNationalsample.Fortheanalysisinthepresentpaper,onlytheprobabilitysampleselectedfrom20districtshasbeenusedtomaketheestimatesnationallyrepresentative.In
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addition,ineachwave,about1200individualsarepurposivelyselectedfromslumareasinandaroundDhakacitytostudythetobaccousebehaviourofthefloatingpopulation.
Article6oftheFCTCandtobaccotaxationinBangladesh
Article6oftheWHOFrameworkConventiononTobaccoControlspecifiesthefollowingmeasuresrelatingtothereductionofdemandfortobaccothroughtaxation:
1.“ThePartiesrecognizethatpriceandtaxmeasuresareaneffectiveandimportantmeansofreducingtobaccoconsumptionbyvarioussegmentsofthepopulation,inparticularyoungpersons.”
2.“WithoutprejudicetothesovereignrightofthePartiestodetermineandestablishtheirtaxationpolicies,eachPartyshouldtakeaccountofitsnationalhealthobjectivesconcerningtobaccocontrolandadoptormaintain,asappropriate,measureswhichmayinclude:
(a)implementingtaxpoliciesand,whereappropriate,pricepolicies,ontobaccoproductssoastocontributetothehealthobjectivesaimedatreducingtobaccoconsumption;and
(b)prohibitingorrestricting,asappropriate,salestoand/orimportationsbyinternationaltravellersoftax‐andduty‐freetobaccoproducts.”
Duringtheperiodoftimebetweenthepassageofthe2005TobaccoControlActuntilWave2oftheITCBangladeshSurveyin2010,theBangladeshgovernmenttookanumberofinitiativesintobaccotaxation:
• Twoadjustmentsofthefourretailpriceslabsforthesupplementaryduty(SD)appliedataprogressiverateoncigarettesinadditionto15%valueaddedtax(VAT);
• IncreasingtheSDbyonepercentagepointateachpriceslabforcigarettes;• IncreasingtheSDonunfilteredbidisfrom17.5%to20%andto25%forfilteredbidis;• Imposinga15%VATand10%SDonsmokelesstobacco(zardaandgul);• Imposinga10%dutyontobaccoexports;• Requiringallcigarette,bidi,andsmokelesstobaccocompaniestopaycorporatetaxes.
DespitethesetaxmeasuresundertakenbytheNationalBoardofRevenue,tobaccoconsumptionremainedunabatedinBangladesh.DatafromWaves1and2oftheITCBangladeshSurveycollectedin2009and2010showsthatthereisampleroomtoimplementstrongerpricingandtaxationmeasurestoreducetobaccoconsumptionandprevalenceinBangladesh.
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Cigaretteandbiditaxes,prices,andconsumption
ThecurrentcigarettetaxinBangladeshiscomposedoftwocomponentscollectedattheproducerlevel:avalueaddedtax(VAT)attherateof15%,andasupplementaryduty(SD)thatvariesatdifferentpricerangesofcigarettepacksof10sticks.Between2009and2010,thepriceslabsforthefourtiersofcigarettepriceswereincreasedandtheSDforeachtierwasraisedbyonepercentagepointasshowninTable1.Theserangeofpriceslabsis,however,notcontinuous.Thegapsbetweensuccessivetiersareshownintherowundereachtierwithcorrespondingpercentageofsmokerswhoreportedpricesinthatrange.ForthepurposeofcalculationofaverageSD,weimputedthetaxrateforeachpricetiertothepricegapabovethattieruntilthelowerlimitofthenexthigherpricetier.
Afterweightingbythenumberofcigarettessmokedperdayasreportedbyindividualsmokers,wefindthataverageSDincreasedfrom38%in2009to45%in2010andaveragerealpriceofapackof10cigarettesincreasedfrom17.4to19.3Takain2009prices(seeTable2).TheaverageSDandcigarettepriceisdrivendownbytheconcentrationofsmokersinthelowesttwopricetiers—79.8%in2009and76.6%in2010.
Theincreaseincigarettepricesbetween2009and2010isreflectedintheupwardadjustmentofthepriceslabsby12to16%onthelowerlimitand5to10%ontheupperlimit.Partofthepriceincreasecanbeattributedtoincreasedtaxratesby1%pointin2010‐11overthe2009‐10rates.Ourestimateshowsthatonaveragethe1%pointincrementinSDresultedinanincreaseinpriceperpackof10cigarettesby0.80Taka.Itaccountedfor4.6%increasefromtheinitialpriceof17.4Takain2009,whilethetotalincreasewas11.2%.Morethanhalfofthepriceincrease(11.2%‐4.6%=6.6%)isattributedtotheincreasedprofitmarginofcigarettemanufacturersanddistributorsandtheincreasedcostofproduction.
Despitethispriceincrease,thenumberofcigarettessmokedperdayremainedalmostthesame—10.2sticksperdayin2009and10.5sticksperdayin2010(Table2).Duringthisperiod,GDPofBangladeshincreasedby6.2%,accordingtoestimatesfromtheWorldBank.ItislikelythatthenegativeeffectofamodestpriceincreaseoninelasticcigarettedemandwasmorethanoffsetbyastrongpositiveeffectofincomegrowthinBangladesh.
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Table1.200910Cigarettetaxesanddistributionofsmokersbypricetiers(weightedbyaveragedailycigaretteconsumption).
Yearof
observationCigarettePriceSlab
Pricetier(Taka) SD(%) %ofcigarettesmokers
Tier1: 7.25–8.75 32 10.1LOW 8.75–16.25 63.6Tier2: 16.25–17.25 52 0.0MEDIUM 17.25–23.25 6.1Tier3: 23.25–29.25 55 5.3HIGH 29.25–46.25 12.0
Wave1(2009)
PREMIUM
Tier4: 46.25+ 57 2.8
LOW Tier1: 8.40–9.15 33 10.0 9.15–18.40 32.9MEDIUM Tier2: 18.40–19.00 53 1.0 19.00–27.00 32.7HIGH Tier3: 27.00–32.00 56 14.7 32.00–52.00 7.6
Wave2(2010)
PREMIUM
Tier4: 52.00+ 58 1.1
Source:NationalBoardofRevenue,GovernmentofBangladesh.
Table2.200910Cigaretteandbidiprice,taxandconsumption.
Cigarette Bidi
2009 2010 2009 2010
Averagecigaretteprice(2009Takaperpackof10) 17.4 19.3 6.0 5.7
AverageSD(%) 37.9 45.1 20.0 20.0
VAT 15.0 15.0 15.0 15.0
AverageSDas%ofaverageprice 24.0 27.0 10.0 12.0
Numbersmokedperday 10.2 10.5 13.6 13.8Note:2010pricesarediscountedby8%toadjustforinflationduring2009‐2010.Source:ITCBangladeshSurvey,2009,2010.
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Theaveragerealpriceofbidis(weightedbythenumberofbidissmokedperday),ontheotherhand,decreasedfrom6.0to5.7Takaperpackof25sticks,whiletheSDonbidisdidnotchangeduringtheperiodof2009‐10.Thenumberofbidissmokedperdayalsoremainedaboutthesameat13.6stickperdayin2009and13.8sticksin2010(Table2).
TheminoreffectofincreasedSDoncigarettepriceandthefallinbidiprices,withalmostunalteredaverageconsumption,indicatesthattheBangladeshgovernmenthasyettogaincontrolovercigaretteandbidiprices,andthusisnotcontrollingtobaccoconsumption.AtthecurrentratesofSDoncigarettes,theshareofSDinthepurchasepricewasonaverage24%forcigarettesand10%forbidisin2009.In2010,thesesharesincreasedslightlyto27%and12%forcigaretteandbidirespectivelyandremainedfarbelowtherecommendedlevelof70%bytheWorldHealthOrganization.5ThuswefindthatthereisampleroomforincreasingSDonbothcigarettesandbidis.
Pricesensitivityofsmoking
Theassociationbetweencigaretteandbidipricesandconsumptionreportedabovedoesnottakeintoaccountfactorsotherthanpricethatcanaffectindividualconsumers’decisiontosmokeandthenumberofcigarettesorbidissmokedperday.Thisassociationcanthereforeconcealthetrueeffectofpricechangeoncigaretteandbididemands.InamultivariateanalysisofindividualleveldatapooledfromtheWave1householdenumeration,andWaves1and2oftheITCBangladeshSurveysconductedin2009and2010respectively,wecontrolledforthefollowing:
• individualdemographicandsocio‐economiccharacteristics(e.g.,age,maritalstatus,education,workstatus,householdsizeandincome,restrictionsonsmokingathomeandworkplace,andrural/urbanareaofresidence),
• numberofyearssinceinitiationofsmokingonaregularbasis(whichreflectsthedegreeofaddiction),and
• theyearofobservation(whichaccountsforoverallmacroeconomiceffectondemand).
Inconsiderationofthepossibilityofsimultaneouslychoosingquantityandpriceofcigarettesbysmokersandresultingendogeneityofprice,weuseaninstrumentalvariablemethodofestimationforthecigarettedemandfunction.WeusedratesofSDoncigarette,housingindexandupazila/thanaofresidenceasinstrumentstopredictcigaretteprice;thisinstrumentedpricevariablewasthenusedinthecigarettedemandequation.Sampling
5 World Health Organization. WHO Technical Manual on Tobacco Tax Administration. World Health Organization, 2010.
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weights,clusteringandstratificationofhouseholdsbysocio‐economicstatusweretakenintoaccountinusingsurveydataforestimation.Thismethodensuresnationalrepresentativenessoftheestimates.
Thepriceelasticityofthenumberofcigarettessmokedperdayisestimatedat‐0.22andthepriceelasticityofthedecisiontosmokecigarettesat‐0.44(seeTable3).Thetotalpriceelasticityofcigarettedemandisthusestimatedtobe‐0.66.Thismeansthatifcigarettepricedoubles,cigaretteconsumptionwillfallby66%.Theseresultsconfirmtheconventionalwisdomthatincreasesincigarettepricecansignificantlyreducecigarettesmokingprevalenceanddailyconsumptionamongsmokers.
Usinghousingindexforstratificationofrespondentsintolow,medium,andhighsocio‐economicstatus(SES),weestimategreaterpricesensitivityofdailycigaretteconsumptionandsmokingprevalenceamonglowerSESrespondents.Thetotalpriceelasticityvariesfrom‐0.76forlowSESto‐0.73formediumSESand‐0.59forhighSESrespondents.Onaverage,two‐thirdsofthispricesensitivityisaccountedforbythepriceresponsivenessofthedecisiontosmoke,indicatingtheenormousrolethatpriceincreasecanplayininducingquittingbehaviouramongcurrentsmokersanddiscouraginginitiationofsmokingbehaviouramongnon‐smokers.
Forestimatingthebididemandequation,theinstrumentalvariablemethodofestimationcannotbeappliedbecausethebiditaxratedidnotchangeduring2009‐2010,anexogenousvariationthatisessentialforidentificationofthebididemandequationfromthepriceequation.Weonlycontrolledforthepriceofbidisandhouseholdincomestatusofbidismokersduetolackofsufficientnumberofobservationstocontrolforalltheexplanatoryvariablesasspecifiedinthecigarettedemandfunction.Becausetheprevalenceofbidismokingisgreateramongthetribalandslumareas,weincludedthesepurposivesamplesintheestimationofbididemandfunctioninadditiontothenationallyrepresentativesample.
Theprevalenceofbidismokingisnotsignificantlyaffectedbythevariationinbidiprice,possiblybecausebidipriceistoolowtoinfluencepeople’sdecisiontoquitbidismokingorpreventinitiationofbidismoking.Theelasticityofthenumberofbidissmokedperdaywithrespecttobidipriceisestimatedtobe‐0.22.
WhenestimatedbySES,wefindthatthedailybidismokingofhighSESsmokersismoresensitivetochangesinbidipricethanthatoflowandmediumSESsmokersandtheirpriceelasticityofbidiconsumptionisstatisticallysignificant.ThehighSESbidismokersusuallypurchasebidisfromthehighendofthebidipricerange,whichoverlapswiththecigarettepricesatthelowerendofcigarettepricerange.Theclosenessofbidiandcigarettepricesatthemarginincreasestheprevalenceofdualsmoking—thatis,smokingbothcigaretteandbidibyasignificantproportionofsmokersinBangladesh.Accordingtohousehold
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enumerationconductedpriortotheWave1(2009)surveyfieldwork,theprevalenceofcigarettesmokingwas18.8%,bidismokingwas12.4%;andsmokingbothbidiandcigaretteswas9.3%.Thusabouthalfofcigarettesmokersandthree‐fourthsofbidismokersinBangladeshsmokebothtobaccoproducts,eitherregularlyoroccasionally.Thesedualsmokerswouldgenerallyhavetendencytoswitchbetweencigaretteandbididependingontherelativepriceofthesetwoproducts,amongothers.Whenbidipriceincreases,thehighSESsmokerstendtocutdownbidiconsumptionandswitchtosmokingcigaretteswhichbecomerelativelycheaper.Outof292exclusivebidismokersinterviewedatWave1,21%weresmokingcigarettesatWave2;of329dualsmokersatWave1,17%becameexclusivecigarettesmokersatWave2.ThetendencytosubstitutecigarettesforbidiisexpectedtobestrongeramonghigherSESsmokersbecauseofgreateraffordabilityofcigarettesamongthem.Thesedynamicsofthejointdecisiontosmokecigaretteandbidicallsformorerigorousinvestigation,whichwouldbeundertakenusingthelongitudinaldatacollectedbyITCBangladeshSurveys.
Table3.200910Priceresponsivenessofsmokingbehaviour.
CIGARETTE All LowSES MediumSES
HighSES
A.Priceelasticityofdailycigaretteconsumptionofsmokers
‐0.22*** ‐0.22*** ‐0.22** ‐0.17***
B.Priceelasticityofcigarettesmokingprevalence
‐0.44*** ‐0.54*** ‐0.51** ‐0.42**
A+B.Totalpriceelasticityofcigarettedemand
‐0.66 ‐0.76 ‐0.73 ‐0.59
BIDI
C.Priceelasticityofdailybidiconsumptionofsmokers
‐0.22** ‐0.13 ‐0.24 ‐0.50**
D.Priceelasticityofbidismokingprevalence
0.03 ‐0.13 0.16 0.22
C+D.Totalpriceelasticityofbididemand
‐0.22 ‐ ‐ ‐0.50
Note:***,**,*standfor1%,5%and10%levelofsignificance,respectively.Source:ITCBangladeshSurvey,2009,2010.
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Thefindingsofpriceelasticityofdemandforcigarettesandbidishaveimportantimplicationsforpublichealth.Forasmoker,positivehealthbenefitsarerealizedtoa(much)greaterextentforquittingthanforreducingconsumption.Andthus,theproportionofthetotalpriceelasticitythatisaccountedforbyelasticityofsmokingprevalenceisrelevanttoanunderstandingoftheimpactofincreasingpriceonquitting.TheWorldBanktreatiseof1999foundthatoverallforhighincomecountries,theproportionofthetotalpriceelasticitythatisaccountedforbyelasticityofsmokingprevalenceisabout50%.6FromouranalysisofITCBangladeshSurveydata,theproportionis0.44/0.66=67%forcigarettes.Thus,iftaxeswereincreasedoncigarettesinBangladesh,therewouldbegreaterimpactonreducingtheprevalencerate(leadingtogreatergainsinenhancinghealthatthepopulationlevel)thanwouldbethecaseinmostothercountries.
ImplicationsfortobaccotaxationpolicyThepriceelasticityestimatesindicatethattobaccoconsumptioncanbesignificantlyreducedbyemployinghighertaxesandprices.Giventheinelasticdemandforcigarettes,itisexpectedthatthepercentagereductionincigaretteconsumptionwouldbelessthanthepercentageincreaseinpricefromagiventaxincrease,thusyieldinggreateramountoftaxrevenuetothegovernment.Althoughbidismokingprevalenceappearstobepriceinsensitive,thedailybidiconsumptionofsmokerscanbesignificantlyreducedbytaxandpriceincrease.Giventheinelasticdemandforbidibycontinuedbidismokers,taxrevenuecollectedfrombidismokerswillcontinuetorisewiththetaxandpriceincrease.
Theeffectivenessoftobaccotaxation,however,canbeweakenedtoagreatextentbythepresenceoftieredadvaloremtaxstructure,suchastheoneforcigarettesinBangladesh,whichmaytriggerdownwardswitchingtolowerpricedbrandswhencigarettetaxesareincreased.Incontrast,therewasupwardmovementofsmokersfromthelowestpricetiertothemediumandhighpricetiersreflectingincreasedaffordabilityofcigarettesin2009‐10—thepercentageofcigarettesmokersinthelowesttierfellfrom73.2%to43.1%andthepercentageinthemediumtwotiersincreasedfrom23.7%to56%(seeFig1).
6 World Bank. Curbing the Epidemic: Governments and the Economics of Tobacco Control. Washington, D.C., 1999.
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Fig1.200910Distributionofcigarettesmokersbytypeofcigarettebrandsatdifferentpricetiers(weightedbyaveragedailycigaretteconsumption)
Note:ThepercentagesarecalculatedbysummingthepercentagesofsmokersbelongingtotheNBR‐specifiedpricetierandthepricegapimmediatelyaboveitfromTable1.Source:ITCBangladeshSurvey2009,2010.Furthermore,thedifferentialtaxstructureandgapsbetweenthepricetiersallowtobaccocompaniestoevadetaxthroughfalsedeclarationofbrandbyusingthesametaxstampsandbanderoleontwopricepointsinthelowerpriceslab.AccordingtotheestimateoftheNationalBoardofRevenue,thegovernmentloses3,000billionTakaannuallyduetothistypeoftaxevasionbytobaccocompanies.Moreover,asTable1shows,agreaterpercentageofsmokersbuycigaretteswithinapricerangethatishigherthanthetierspecifiedbytheNationalBoardofRevenueandfallsbetweentwosuccessivetiers.Thisphenomenonisattributabletothefactthatmorethantwo‐thirdsofcigarettepurchasestakeplaceinloosecigarettesratherthaninpackform.Purchasingloosecigarettescoststhesmokermoreperstickthanitwouldcostthemhadtheyboughtinpacks.Inprinciple,thegapsbetweenpricetiersshouldberemovedandthepriceslabsshouldbecontinuous.However,advaloremtaxoughttobereplacedbyspecific(unit)taxinviewoftheconsiderationthattobaccoproductsofallpricelevelsareequallyharmfultohealth.Tobaccotaxshouldnotbedifferentiatedbydifferentialtaxratesonthegroundofprogressivityoftaxrate.
Smokers’opinions:Doesprice/taxoftobaccoproductsmatter?
AnumberoffindingsfromtheITCBangladeshSurveysuggestthatsmokerscareaboutthecostsofbuyingcigarettesorbidis.Taxandpriceincreaseswillmotivatethoughtsandactionamongsmokerstowardcuttingdowntobaccoconsumptionorquitting.Moreover,taxandpriceincreasecantriggercompensatorybehaviouramongbothsmokersandtobaccomanufacturerstominimizecostsandavoidtaxes,whichcaninturnunderminetheeffectivenessoftaxationasatobaccocontrolmeasure.
73.7%
6.1%
17.3%2.8%
2009
Low
Medium
High
Premium
42.9%
33.7%
22.3%
1.1%
2010
Low
Medium
High
Premium
12
1. Tobaccospending:Themajorityofsmokers(91.3%ofcigarettesmokersand85%ofbidismokers)atWave1saidthattheyspendtoomuchmoneyontobacco.Thepercentages,however,decreasedto81.8%and80.1%forcigaretteandbidismokersrespectivelyatWave2.Thissuggeststhattheaffordabilityofcigaretteandbidihasincreased(seeFigure2).About75%ofcigarettesmokersand66%ofbidismokersatWave2reportedthinkingabouthowmuchmoneytheyspendontobacco.Theopportunitycostoftobaccouseisreflectedintheresponseof4‐5%ofsmokerswhoreportedthattheyspentmoneyontobaccothattheyweresupposedtospendonfood.However,theaveragemonthlyhouseholdspendingontobaccoproductsislowandactuallydecreasedinrealtermsfrom571TakaatWave1to529TakaatWave2.Fig2.Percentageofcigaretteandbidismokerswhoagreeorstronglyagreethattheyspendtoomuchmoneyontobacco,Wave1andWave2
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2. Quitting:About6%ofsmokersatWave1hadquitsmokingatWave2.Ofthosewhohadquit,36.3%reportedthatpricewasoneofthereasonsforquitting—54.5%ofcigarettesmokersand38.6%ofbidismokers.Thesepercentages,however,decreasedto42.4%forcigarettesand26.8%forbidiatWave2indicatingthattheroleofpriceinstimulatingquitintentionshadweakenedconsiderablyinjustoneyear(Figure3).
Fig3.Percentageofexclusivecigaretteandexclusivebidismokerswhothinkthatpriceoftobaccoisareasontoquit,Wave1andWave2.
Thepercentageofcigarettesmokers(includingdualsmokers)whothinkthatpriceisareasonforquittingsmokingisthethirdlowestof19ITCcountries(Figure4).ThesearestrongindicationsthatpriceisnotanimportantfactorinmotivatingsmokerstoquitinBangladesh,convergentevidencefortheimportanceofincreasingtax/priceinthecountry.
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Fig4.Percentageofsmokerswhothinkpriceisareasontoquitsmokingin19countriesoftheITCProject.
3. Productsubstitution:Outof2100exclusivecigarettesmokersatWave1,4%switchedtobidisoraddedbidistotheircigarettesmokingbyWave2.91.4%ofsmokerswhoswitchedfromexclusivecigarettetoexclusivebidismokingreportedthattheychosebidisovercigarettesbecausebidisarecheaperthancigarettes.35.9%ofsmokerswhowereexclusivecigarettesmokersatWave1andstarteddualsmokingreportedthattheyaddedbidisbecausebidisarecheaperthancigarettes.Thusitappearsthatthelargepricedifferentialbetweencigarettesandbidisinducesproductsubstitutionandswitchingtothecheaperbidis.Thisweakenstheeffectivenessoftaxandpriceincreasesinreducingtobaccoconsumption.
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4. Brandchoice:58%ofcigarettesmokersand60.9%ofbidismokersatWave1
reportedthattheyselectedthebrandtheyusuallysmokeduetoitsprice.Thesepercentagesincreasedto60.4%and65.8%atWave2.Amongtherelativelyfewsmokerswhosmokeforeignbrands,1.2%ofcigarettesmokersand3.1%ofbidismokersatWave1reportedthatpricewasthereasonforselectingtheparticularforeignbrandtheysmoke.However,atWave2,thecorrespondingpercentageshotupto10%forcigarettesmokerswhilefallingto1.5%forbidismokers.Thismightsignalthatforeignbrandcigarettesarepenetratingthedomesticmarketthroughpricecompetitionwithdomesticbrands,whiledomesticbidiproducersareoutcompetingforeignbrandsofbidi.
5. Tax/priceavoidance:7.9%ofcigarettesmokersand19.3%ofbidismokersatWave1reportedthattheymadespecialeffortstobuycheaperproductsthanthoseavailableinlocalstores.Thesefindingsreflectthatthiscostminimizingbehaviourismoreprevalentamongbidismokers.Thispercentage,however,increasedslightlyto8.6%forcigarettesmokersanddecreasedto17.3%forbidismokersatWave2.Thefactthatthistendencyisgrowingamongcigarettesmokersandfallingamongbidismokersmightbetheoutcomeofthegrowingpricedifferentialbetweencigaretteandbidi.Moreover,4.2%ofsmokersatWave1reportedthattheyreceivedspecialpriceoffersfromtobaccosellers.Thispercentageincreasedto7%atWave2,whichmaysuggestthattobaccocompanieshaveexpandedtheirtobaccopromotioneffortsbyofferingpriceincentivestosmokers.
SummaryandPolicyRecommendations
Globally,tobaccotaxationhasprovedtobeoneofthemostpotentinstrumentsincurbingthetobaccoepidemic.Thenegativerelationshipobservedbetweentobaccoconsumptionandpricingsuggeststhatincreasingtobaccotaxesbyasignificantamountcouldpotentiallyavertmillionsofprematuretobacco‐induceddeathsanddisabilitiesinBangladesh.AsthecigarettesmokerswithlowerSESaremorepricesensitive,theywillcutdowntheirsmokingbyalargerpercentagethanthesmokerswithhigherSES.Asaresult,greaterhealthgainswillaccruetothosewithlowerSES.Tobaccotaxcanthuscontributetoreductioninhealthinequalityaswell.Atthesametime,thegovernmentcanreapsignificantgainsintaxrevenuebecausetheconsumptionofcigarettesandbidiswouldfallbyalesserpercentagethanthepercentageincreaseinprice.Thusthegoalsofpublichealthpromotionandtaxrevenueincreasearenon‐competing.Unlikeotherpoliciesthatmayhaveunexpectednegativeconsequences,increasingexcisetaxesoncigarettesandbidisrepresentsatruewin‐winopportunityfortheBangladeshGovernment.
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Ourestimatesshowthatinordertomeettherequirementofexcisetaxontobaccoaccountingfor70%ofretailprice,theSDonbothcigaretteandbidimustincreaseto400%.Otherthingsremainingthesame,thistaxratewillincreasecigaretteandbidipricesmorethanthreefold.Weappreciatethefactthatitmaynotbefeasibletoraisethecurrenttobaccotaxratesto400%atatimewhenthereispoliticalresistancetoANYtaxincreasefromthebeneficiariesoftobaccouse.ThegovernmentofBangladeshcanconsiderasuboptimalexcisetaxratethatissignificantlyhigherthanthecurrentrates,whichwouldstilloperatetoreduceoveralltobaccodemandinthecountry.
InviewofthefindingsoftheanalysespresentedfromtherichanddetailedinformationcollectedintheITCBangladeshSurveyovertwoyears,thefollowingrecommendationscanbemadeforthecurrenttobaccotaxpolicyinBangladeshovershort,medium,andlongterms:
Shorttermstrategy:Reducethegapbetweenthetaxratesfordifferenttiersofcigarettepricesandworktowarduniformtaxrates.
1. ReducethenumberofpricetiersforcigarettesfromfourtothreebymergingtoptwotiersforhighandpremiumbrandcigarettesandapplySDat58%.Thisratewouldbeapplicabletoallcigaretteswithretailpriceabove20Takagiventhe2010‐11priceslabs.
2. Forthemediumleveltier,raisetheSDto56%.3. IncreasetheSDrateforthelowesttierfrom33%to40%.4. LevySDonbidisbasedonretailpriceinsteadoftariffvalue.TherateofSDon
unfilteredbidicanbemaintainedat20%intheshort‐term.
Mediumtermstrategy:Reducethetaxgapbetweenbidisandthecheapestcigarettesandintroduceaspecificexcisetaxfloor.
1. IncreasetheSDonbidis(bothunfilteredandfiltered)from20%to40%toeliminatethedifferencewiththeSDforthecheapestcigarettes.
2. Introduceaspecificexcisetaxinadditiontotheexistingadvaloremtax,inordertoensureaminimumpriceforcigarettesandbidis.
3. Forcigarettes,theruleshouldbetoraisetheaveragepriceoflowpricebrands,whichiscurrently10Takaperpackof10,totheleveloftheaveragepriceofmediumpricebrands,whichiscurrently20Takaperpack.Inordertoachievethisgoalofsettingtheminimumpriceperpackof10cigarettesat20Taka,specifictaxshouldbesetat10Takaforcigarettesthatarecurrentlysoldfor10Takaorbelow.
4. Forbidi,theminimumpriceshouldberaisedto20Takaperpacktomaketheaveragepriceofbidicomparabletothecheapestcigarettesaftertheadditionofthespecifictax.Thiswouldrequireaspecifictaxof14Takaperpackofbiditoraisetheaverageretailpriceofapackofbidifromthecurrentlevelof6Takato20Taka.
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Longtermstrategy:Harmonizetheexcisetaxrateandreplaceadvaloremtaxwithspecificexcisetax.
1. Harmonizetheexciseratesbylevyingsametaxratesforalltobaccoproducts.2. Increasethetaxratesbythesameamountforalltobaccoproducts.3. Replacetheadvaloremtaxratecompletelywithspecificexcisetax.4. Adjustthespecifictaxforinflationandincomegrowtheveryyear.
australiaBangladeshBhutanBrazilCanada
China (Mainland)FranceGermanyIndiaIreland
MalaysiaMauritiusMexicoNetherlandsNew Zealand
South KoreaThailandUnited KingdomUruguayUnited States of america
20 countries • 50% of the world’s population 60% of the world’s smokers • 70% of the world’s tobacco users
The International Tobacco Control Policy Evaluation Project
The ITC ProjectEvaluating the Impact of FCTC Policies in...
Geoffrey T. Fong, Ph.D. Department of Psychology University of Waterloo 200 University Avenue West Waterloo, Ontario N2L 3G1 Canada
Email: [email protected] Tel: +1 519-888-4567 ext. 33597 www.itcproject.org