Original Research

Effect of a large increase in cigarette tax

on cigarette consumption: an empirical
analysis of cross-sectional survey data
Jie-Min Lee*
Department of Logistic Management, National Kaohsiung Marine University,
142 Hai-Chuan Road, Nan-Tzu, Kaohsiung, Taiwan, ROC
Received 3 December 2006; received in revised form 26 August 2007; accepted 21 December 2007
Available online 7 July 2008
KEYWORDS
Cigarette tax;
Price elasticity;
Tobacco control;
Taiwan
Summary Objectives: This study used cigarette price elasticity estimates to
assess the possible effects on cigarette consumption of a large increase in cigarette
tax. It also investigated different responses to the cigarette tax increase among
smokers from different socio-economic backgrounds and with different smoking
characteristics.
Study design: Cross-sectional study on 483 valid questionnaires completed during
a telephone survey of current smokers aged 15 years and above from all 23 major
cities and counties in Taiwan.
Methods: This study analysed the willingness of current smokers to quit smoking or
reduce cigarette consumption when faced with a tax increase of NT$22 per pack,
which would raise the price of cigarettes by 44%. The Tobit regression model and
the maximum likelihood method were used to estimate cigarette demand elasticity.
Results: Estimation results yielded a cigarette price elasticity of 0.29 in connec-
tion with a 44% increase in the price of cigarettes. This suggests that smokers will
have relatively little response to such an event. The most signicant response to
the price increase was found among women, low-income smokers, moderately
addicted smokers, and smokers who regularly purchase low-price cigarettes. A
44% increase in the price of cigarettes would reduce the average annual per capita
cigarette consumption in Taiwan by 14.86 packs; a reduction of 12.87%. The tax in-
crease would also boost the Governments cigarette tax revenue by approximately
NT$41.4 billion, and increase cigarette merchants income by approximately
NT$27.4 billion.
Conclusions: Since current cigarette prices are low in Taiwan and smokers are
relatively insensitive to cigarette price hikes, a large increase in cigarette tax would
reduce cigarette consumption effectively, and would also increase the Govern-
ments cigarette tax revenue and cigarette merchants income. Clearly, such
* Corresponding author. Tel.: 886 7 3617141x3459; fax: 886 7 3649601
E-mail address: jmlee866@yahoo.com.tw
0033-3506/$ - see front matter 2008 The Royal Institute of Public Health. Published by Elsevier Ltd. All rights reserved.
doi:10.1016/j.puhe.2007.12.013
Public Health (2008) 122, 1061e1067
www.elsevierhealth.com/journals/pubh
a tax would create a winewin outcome for the Government, cigarette merchants
and smokers, and it is therefore recommended.
2008 The Royal Institute of Public Health. Published by Elsevier Ltd. All rights
reserved.
Introduction
Since joining the World Trade Organization in 2002,
the Government of Taiwan has paid close attention
to tobacco product management and tobacco con-
trol response measures. One of the greatest chal-
lenges in this regard is that the price of cigarettes in
Taiwan is relatively low compared with prices in
many other countries.
1,2
For example, according to
World Health Organization (WHO) data, the average
price of a pack of cigarettes in September 2002 in
the USA, Australia and Japan ranged between
US$2 and US$4. In the UK, it was US$6.93. In Taiwan,
however, it was US$1.01.
To put this gure into perspective, cigarettes in
Taiwan cost less than 15% of the average price per
pack in the UK! A comparison of cigarette prices
and income levels makes this difference even more
remarkable. The International Monetary Fund
estimated that per capita gross domestic product
gures in the UK in 2002 were 1.2 times greater
than those in Taiwan, while US gures were 1.6
times greater. However, the price of domestic
cigarettes was 6.9 times higher in the UK and 4.0
times higher in the USA than in Taiwan.
The low price of cigarettes in Taiwan has made it
difcult to reduce the smoking population signi-
cantly. In 2002, Taiwan had more than 4.5 million
smokers, which implies that one out of every three
adults is a smoker.
3
Apart from the direct toll that
smoking takes in sickness and loss of life, the coun-
try spends approximately NT$18 billion annually on
treating tobacco-induced diseases among male
smokers alone. This represents 12% of all health
insurance expenditures. Annual economic losses
attributed to smoking exceed NT$30 billion.
4
As
many studies have shown that cigarette taxes can
reduce cigarette consumption,
5e8
the Government
of Taiwan has started using them as one of its most
important tobacco control tools.
9e11
Guindon et al.,
12
Lee et al.,
13
Ye et al.
14
and
Lee
15
studied the effectiveness of tobacco taxes
in southern Asia countries, especially Taiwan, and
found that the ability of tax-induced cigarette price
increases to reduce consumption mainly depends
on the price elasticity of cigarettes. Past estimates
have indicated that the price elasticity of ciga-
rettes in high-income countries is generally in the
range of 0.25 to 0.5,
16,17
while it is in the range
of 0.5 to 0.7 in Taiwan.
18
The high price elastic-
ity of cigarettes in high-income countries suggests
that Taiwan can maximize its cigarette control
results with a high cigarette tax policy.
On 1 January 2002, the Government of Taiwan
implemented the Wine and Tobacco Tax Act. This
brought about major changes in the tobacco prod-
uct tax system, including the implementation of
the rst ever health contribution for alcohol and
tobacco of NT$5 per pack. However, smoking-in-
duced diseases continued to place a huge burden on
the health insurance system, so in February 2006,
the Government increased the health contribution
by an additional NT$5 per pack. This brought the
retail price per pack of cigarettes to approximately
NT$50.
Today, taxes account for approximately 43.6%
of the retail price of cigarettes; however, when
compared with equivalent gures for high-income
countries, the percentage is still relatively low. In
1998, WHO announced that average per capita
cigarette consumption in 128 countries was approx-
imately 61 packs; as of 2002, average per capita
cigarette consumption in Taiwan was 96.81 packs.
To reduce cigarette consumption in Taiwan to
the world average, it has been calculated that an
additional tax of NT$22 is needed.
19
Previous research on the effect of tax on ciga-
rette consumption has mainly focused on assessing
the effect of actual cigarette tax increases on
cigarette prices. However, cigarette price increases
also affect consumption patterns.
20
For example,
smokers may choose to quit smoking, reduce the
number of cigarettes they smoke, change to a
cheaper brand, or maintain their original levels of
consumption.
To assess the relationship between price and
consumption patterns, a cross-sectional survey of
Taiwanese smokers was undertaken to obtain their
responses to an increase in cigarette tax of NT$22
per pack, which is equivalent to a 44% price
increase. This study also investigated whether
smokers socio-economic backgrounds and smoking
characteristics would play a role in their responses.
The ndings of this study can serve as an important
reference for the Governments adjustment of the
health contribution on tobacco products.
1062 J.-M. Lee
Methods
Data collection
From April to July 2004, a telephone survey was
conducted of current smokers aged 15 years or more
from all 23 major cities and counties in Taiwan. The
number of people surveyed and the proportion of
male to female smokers in each city and county was
proportional to its population and male to female
smoker ratio. For the purposes of this study, a
current smoker was dened as someone who had
smoked at least 100 cigarettes in his or her lifetime
and now smokes either every day or every few
days.
21
Since no data are available on the way in which
a smokers consumption patterns change after an
increase in the price of a pack of cigarettes, and
such patterns cannot be observed naturally in an
experiment, it was decided to ask the respondents
how they believed their consumption patterns
might change if an additional surcharge of NT$22
was imposed on a pack of cigarettes. Although
this approach may be considered somewhat nave,
it is thought to be justiable given the circum-
stances. For corroboration of such a method, see
Tsai et al.
22
The survey collected a total of 963 pieces of
data. During the interview, each respondent was
asked, Would a future increase in cigarette tax of
NT$22 per pack have an effect on your cigarette
consumption? Respondents who said Yes were
then asked, In what way would your consumption
change? Their responses mainly consisted of quit-
ting smoking, reducing cigarette consumption,
switching to less expensive brands, and maintain-
ing their original cigarette consumption without
change. Willingness to quit smoking or reduce
cigarette consumption were analysed based on
responses given in the 483 valid questionnaires.
The survey also included two additional sets of
questions. The rst asked respondents to name
the three brands of cigarettes that they smoked
most often and how much they paid for each
brand. This enabled calculation of the average
retail price for each brand. The second asked
respondents questions about their socio-economic
background and smoking characteristics. These
included demographic factors (sex, years of smok-
ing, level of education), economic factors (per-
sonal monthly income) and degree of tobacco
addiction (number of cigarettes smoked each
day). Smokers were classied as light (less than
one pack of cigarettes per day), moderate (one
to two packs per day) or heavy (more than two
packs per day).
Cigarette demand function
Previous research studies have found that socio-
economic status plays a role in cigarette consump-
tion.
23e28
Therefore, it is essential to estimate
different subgroup elasticities of the population in
order to understand the responses that different
smokers might have to an excise tax. This approach
showed some reasonable results on price elasticity
estimation when it was used to analyse cross-
sectional survey data on the 1998 cigarette tax of
NT$5.
13
Similarly, using questionnaire data for
central Taiwan from the Bureau of National Health
Insurance, Lee
29
was able to calculate that the
average health contribution per pack of cigarettes
was NT$25.63.
To conduct the assessment, this study used
a hypothetical tax increase of NT$22, which would
increase the price of a pack of cigarettes from
NT$50 to NT$72. A cigarette demand function was
constructed as a function of cigarette prices and
individual income, and cigarette price elasticity
was estimated after distinguishing smoker groups
based on individual socio-economic backgrounds
and smoking characteristics. The following repre-
sents the cigarette demand function:
DQ
D
ij
b
0j
b
1j
DP
ij
b
2j
I
ij
e
ij
1
where i 1, 2. n, and i indicates each smoker
who was willing to reduce their cigarette consump-
tion. The sample number was n, and j consisted of
smoker subgroups with different socio-economic
statuses. Each variable was dened as follows:
DQ
D
ij
indicated the percentage by which a respon-
dent would reduce his or her cigarette consumption if
thepriceincreasedbyNT$22per pack. DQ
D
ij
was calcu-
lated as DQ
D
ij
Q
cigarette tax
ij
Q
initial
ij
=Q
initial
ij
100%
where Q
initial
ij
represented a smokers self-reported
initial cigarette consumption, and Q
cigarette tax
ij
repre-
sented the self-reported cigarette consumption after
imposition of an NT$22 tax.
DP
ij
represented the percentage change in the
price that a respondent would pay per pack of ciga-
rettes if the tax increased by NT$22. DP
ij
was calcu-
lated as DP
ij
P
cigarette tax
ij
P
initial
ij
=P
initial
ij
100%
where P
initial
ij
represented a respondents self-repor-
ted initial cigarette price level, and P
cigarette tax
ij
rep-
resented the self-reported cigarette price level
after imposition of an NT$22 tax.
I
ij
represented a respondents monthly personal
income, while e
ij
represented an error term.
After constructing a cigarette consumption re-
duction demand function model, it was found that
if the cigarette consumption reduction percentage
was reduced to between 0 and 1, it would lead to
Effect of a large increase in cigarette tax on cigarette consumption 1063
the so-called censoring problem. This was re-
solved using the maximum likelihood method to
estimate the Tobit regression model via Equation
(1), and by simulating the change in cigarette
consumption caused by different cigarette price
increases.
Results
As can be seen in Table 1, 31.7% and 18.5% of the
respondents would reduce their cigarette consump-
tion and quit smoking, respectively, in the face of
a 44% price increase, while 37.7% would not change
and 12.1% would switch to a cheaper brand. The
study found that women have four times the ciga-
rette price elasticity of men. This implies that
a large increase in cigarette prices will cause a sig-
nicant reduction in consumption among female
smokers.
With regard to educational level and age,
this study found that adolescent smokers under 18
years of age, and smokers with a junior high school
education or less, displayed a relatively large
response to cigarette price changes. However,
they still had a low cigarette price elasticity. This
suggests that although these two categories of
smokers would reduce cigarette consumption in
the face of a price increase, the effect would not be
signicant.
With regard to income levels, respondents with
a monthly income of NT$9999 or less displayed a
price elasticity of 0.6273. In contrast, smokers
with a monthly income of between NT$10,000 and
NT$29,999 displayed a price elasticity of 0.4803.
It can be inferred from this that smokers with a
monthly income of NT$9,999 or less would reduce
their cigarette consumption by 27.6% when
confronted by a 44% increase in the price of
cigarettes.
Number of packs smoked per day was used as a
proxy for the degree of tobacco addiction. Moder-
ately addicted smokers (one to two packs per day)
displayed a price elasticity of 0.6468, while
heavily addicted smokers (more than two packs
per day) displayed a price elasticity of 1.4111. This
indicates that although a large increase in the
price of cigarettes would not reduce cigarette
consumption among heavily addicted smokers, it
would reduce consumption signicantly among
moderately addicted smokers. When smokers
were grouped by the price of the cigarette brand
they usually purchased, those who smoked ciga-
rettes with a price of less than NT$60 per pack
displayed a relatively large response to the price
increase, and would reduce their cigarette con-
sumption by 35.73% in the face of a 44% price
increase.
As shown in Table 2, the estimated cigarette
price elasticity is 0.29. Although this indicates
that a 44% increase in the price of cigarettes would
reduce cigarette consumption, the fact that price
elasticity is less than 1 reveals that smokers are
not particularly sensitive to even a large cigarette
price hike. This studys result is lower than the
0.5 to 0.7 price elasticity found by previous
researchers on cigarette price elasticity in Taiwan,
which suggests that a large increase in the price of
cigarettes would not necessarily cause an increase
in cigarette price elasticity.
On the contrary, due to low cigarette price
elasticity, although average annual cigarette con-
sumption per capita would decrease by 14.86 packs
(12.87%), cigarette merchants sales would actually
increase by NT$27.4 billion. In addition, since total
annual cigarette consumption in Taiwan is now
1.881 billion packs, an increase in cigarette tax of
NT$22 per pack would increase the Governments
tax revenue by NT$41.38 billion.
In summary, a large increase in cigarette prices
would be very effective at reducing cigarette
consumption among female smokers, low-income
smokers, moderately addicted smokers, and
smokers who purchase mid- and low-price
cigarettes.
Discussion
The implementation of the Wine and Tobacco Tax
Act on 1 January 2002 brought about major
changes in Taiwans tobacco product tax system,
including the imposition of the rst ever health
contribution on cigarettes of NT$5 per pack. A
further NT$5 increase in the health contribution
was implemented in 2006, raising the total health
contribution on each pack of cigarettes to NT$10.
Currently, the retail price of a pack of 20 ciga-
rettes is approximately NT$50, and tax accounts
for approximately 43.6% of the price. These gures
Table 1 Smokers response to a cigarette tax sur-
charge of NT$22
Smokers response n %
Would be no change 363 37.7
Would smoke less 305 31.7
Would quit 178 18.5
Would switch brands 117 12.1
Total 963 100.0
1064 J.-M. Lee
are still quite low compared with equivalent
gures in the worlds developed countries.
The low price of tobacco products is one of the
largest obstacles facing the Governments efforts
to control tobacco consumption. This study discov-
ered that a 44% increase in the price of a pack of
cigarettes would reduce cigarette consumption by
12.87%, increase the Governments tax revenue by
NT$41.38 billion, and boost cigarette merchants
income by approximately NT$27.4 billion. Hence,
such an increase would result in a winewin
outcome.
For all of these reasons, it is recommended that
the Government should implement a large increase
in cigarette tax. If 70% of the health contribution
portion of the cigarette tax increase is used for the
national health insurance reserve fund, and 30% is
used for central and local government tobacco
control efforts, public health and social welfare,
the tax would simultaneously promote social fair-
ness and reduce the regressive effects of a ciga-
rette tax. Furthermore, since cigarettes lack price
elasticity, increasing the health contribution lev-
ied on cigarettes would increase the Governments
cigarette tax revenue and help to ll the current
health insurance funding gap.
Public health surveys in Europe and the USA
discovered long ago that disparities in health
parallel disparities in wealth. The poor suffer from
many chronic diseases at rates several times higher
than those of more afuent citizens. In particular,
low-income people are signicantly more suscepti-
ble to cardiovascular disease, lung disease and
many types of cancer. Low-income people who
smoke have a dramatically higher rate of chronic
diseases.
This study found that low-income smokers with
a monthly income of NT$9999 or less are particu-
larly sensitive to cigarette price increases. Since
adolescents with early smoking initiation who
become addicted to tobacco and nd it hard to
quit smoking typically have low incomes, increas-
ing tobacco product prices would also curb ado-
lescent smoking to some degree.
30
Table 2 Estimated cigarette price and income elasticities of cigarette demand in smokers with different socio-
economic backgrounds and smoking characteristics
Characteristics n Price elasticities Income elasticities
Overall 483 0.2937 (1.982)** 0.0434 (2.752)**
Gender
Male 441 0.2277 (1.459) 0.0443 (2.576)**
Female 42 0.9612 (2.039)** 0.0435 (1.021)
Age (years)
18 10 0.2119 (0.239) 0.0386 (0.972)
19e34 172 0.0015 (0.006) 0.0104 (1.392)
35e54 185 0.1171 (0.435) 0.2963 (0.964)
55 116 0.053 (0.159) 0.0518 (2.005)**
Education
College and above 129 0.0995 (0.391) 0.0958 (3.059)**
High school 182 0.0649 (0.249) 0.1793 (0.622)
Junior high school 172 0.1143 (0.444) 0.0554 (2.459)**
Monthly income (NT$)
9999 133 0.6273 (2.480)** e e
10,000e29,999 116 0.3791 (1.228) e e
30,000e49,999 107 0.4803 (2.595)** e e
50,000 117 0.1826 (0.624) e e
Smoking degree
Light smoker 324 0.1974 (1.134) 0.0467 (2.683)**
Medium smoker 141 0.6468 (2.279)** 0.0603 (1.860)*
Heavy smoker 18 1.4111 (2.160)** 0.4.066 (0.035)
Cigarette price (NT$)
39 172 0.8126 (1.875)* 0.2044 (0.830)
40e59 275 0.8121 (2.107)** 0.0510 (2.337)**
60 36 2.1866 (0.924) 0.1009 (1.579)
Note: t ratios are shown in parentheses; **P < 0.05, *P < 0.1.
Effect of a large increase in cigarette tax on cigarette consumption 1065
Smokers confronted by cigarette price increases
inevitably increase their cigarette spending in the
short term. After some time has passed, however,
they tend to adopt alternative coping methods,
such as smoking lower-price brands or reducing
their consumption. This study discovered that
a price increase of 44% would induce smokers of
low- and mid-price cigarettes to reduce their
consumption signicantly. However, since smokers
may switch to low-price cigarettes to maintain
their smoking habits, consumption of such prod-
ucts may actually increase sharply.
The challenges of low-price
and/or smuggled cigarettes
A large increase in cigarette tax could induce
smokers to increase their purchases of low-price
and/or smuggled cigarettes. This would have seri-
ous consequences because such cigarettes tend to
contain higher levels of nicotine, making themeven
more harmful to smokers health than other types
of cigarettes. They also reduce the Governments
tax revenue and cigarette merchants income.
To resolve this dilemma, it is recommended that
the Government should establish monitoring mech-
anisms geared to obtaining data about the quantity
and price of smuggled cigarettes. It is also recom-
mended that public health authorities should
strengthen their efforts to increase public aware-
ness of the health risks associated with high-nico-
tine cigarettes. Finally, it is recommended that the
Government should consider replacing cigarette
quantity with nicotine content as the unit of
taxation. Doing so will help to avoid a situation
where smokers respond to higher cigarette
prices by buying low-price or smuggled cigarettes,
thereby precluding any drop in overall nicotine
consumption.
Directions for future research
This study used a cigarette price increase of 44% as
its baseline assumption. Future estimates of ciga-
rette price elasticity based on additional price
points will facilitate a better understanding of the
relationship between consumption patterns and
price. The major advantage of cross-sectional
surveys is that they offer an adequate and repre-
sentative sample size for empirical study. This is
helpful when evaluating how consumers will
change their consumption habits with regard to
tax increases. However, a major research limita-
tion of this method is that what respondents say
they will do in a hypothetical situation can differ
from what they actually do in reality. Future
research will therefore need to be conducted
following such an increase to verify its actual
effects.
Ethical approval
None sought.
Funding
National Science Council of the Executive Yuan
(executive branch of the Republic of China) NSC-
94- 2415-H-022-001.
Competing interests
None declared.
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Effect of a large increase in cigarette tax on cigarette consumption 1067