An empirical analysis of the impact of income change and cigarette taxation in a price-tiered cigarette market of Bangladesh
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East West University, Department of Economics, Bangladesh
American Cancer Society, Economic and Health Policy Research Unit, United States of America
University of Dhaka, Department of Economics, Bangladesh
University of Waterloo, Department of Psychology, Canada
Publication date: 2018-03-01
Tob. Induc. Dis. 2018;16(Suppl 1):A593
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Taxing tobacco is among the most effective measures of tobacco control. However, in a tiered market structure where multiple tiers of taxes co-exist the anticipated impact of tobacco taxes on consumption is complex. This paper investigates changing smoking behavior in lieu of rising prices and changing income. The objective of the paper is to evaluate the effectiveness of change in prices (through taxes) and change in income in a price-tiered cigarette market. Do taxes successfully lead smokers to reduce consumption or simply move to a different price tier? How do income change affect smoking behavior?

A panel dataset from the ITC Bangladesh surveys is used for the analysis. The nature of dataset allowed for observing the impact of tax and income change on the smoking behavior of the same individual over a length of three years. Probit regressions are used to identify the effects of changes in prices and changes in income along with other control variables.

Transition matrices show significant movement of smokers across price tiers from one wave to another. Regression results show when smokers face higher cigarette prices, their probability to down-trade increases and probability to up-trade decreases. Interestingly higher taxes do not increase the probability to quit. Also, higher income raises the probability to up-trade and decreases the probability to quit smoking.

It is evident from the results that a price-tiered market provides smokers more flexibility to accommodate their smoking behavior when faced with price and income change. Therefore, tiered structure of the tax system should be replaced with uniform taxes so that all price tiers are taxed with equal aggression. Results also reveal the need for overall cigarette taxes to be raised to an extent so that it off-sets any positive effects of income growth.

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