Simulation of Tobacco Tax Increase on Chinese Economy

Presenter: Zhengzhong Mao

Abstract

To assess the potential impact of raising cigarette taxes on the smoking prevalence rate, number of lives saved, and government tax revenue in China, simulation analyses were performed based on price elasticities of -0.15, a rather conservative estimate. To achieve the goal of discouraging consumption of cigarette, a specific excise tax (1 RMB per pack or a tax rate from 40% to 50$ of retail price) is used for simulation. It was found that an increase in specific excise tax of RMB 1 on a pack of cigarettes would increase government revenue by RMB 85.4 billion (US $10.4 billion), reduced 4.1 million smokers. Assuming 25 percent of smokers will die from tobacco-related illness, an additional 1 RMB specific tax could mean 1 million lives could be saved. Furthermore, additional cost savings in medical services and increased productivity attributable to the increase in tobacco tax would be estimated.

The estimated negative impact of tobacco tax increase on employment in cigarettes including and tobacco farming are quite minimum. The amount of additional government tax revenue is about 17 times more than the economic loss of tobacco industry. The Chinese government may consider allocating some of the additional tax revenue to earmark financial assistance to tobacco farming and retraining cigarette industry employees.