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The Role of Taxation in Tobacco Control and its Potential Economic Impact in China

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To identify key economic issues involved in raising the tobacco tax and to recommend possible options for tobacco tax reform in China. Estimated price elasticities of the demand for cigarettes, prevalence data and epidemiology are used to estimate the impact of a tobacco tax increase on cigarette consumption, government tax revenue, lives saved, employment and revenue loss in the cigarette industry and tobacco farming. The recent Chinese tax adjustment, if passed along to the retail price, would reduce the number of smokers by 630,000 saving 210,000 lives, at a price elasticity of -0.15. A tax increase of 1 RMB (or US$0.13) per pack of cigarettes would increase the Chinese government's tax revenue by 129 billion RMB (US 17.2 billion), decrease consumption by 3.0 billion packs of cigarettes, reduce the number of smokers by 3.42 million and save 1.14 million lives. The empirical economic analysis and tax simulation results clearly indicate that increasing the tobacco tax in China is the most cost-effective instrument for tobacco control.
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The role of taxation in tobacco control and its
potential economic impact in China
Teh-wei Hu,
1,2
Zhengzhong Mao,
3
Jian Shi,
4
Wendong Chen
5
ABSTRACT
Objectives To identify key economic issues involved in
raising the tobacco tax and to recommend possible
options for tobacco tax reform in China.
Methods Estimated price elasticities of the demand for
cigarettes, prevalence data and epidemiology are used to
estimate the impact of a tobacco tax increase on
cigarette consumption, government tax revenue, lives
saved, employment and revenue loss in the cigarette
industry and tobacco farming.
Results The recent Chinese tax adjustment, if passed
along to the retail price, would reduce the number of
smokers by 630 000 saving 210 000 lives, at a price
elasticity of 0.15. A tax increase of 1 RMB (or US$0.13)
per pack of cigarettes would increase the Chinese
government’s tax revenue by 129 billion RMB (US 17.2
billion), decrease consumption by 3.0 billion packs of
cigarettes, reduce the number of smokers by 3.42 million
and save 1.14 million lives.
Conclusion The empirical economic analysis and tax
simulation results clearly indicate that increasing the
tobacco tax in China is the most cost-effective
instrument for tobacco control.
INTRODUCTION
China grows about one-third of the worlds tobacco
crop and consumes one-third of the worlds ciga-
rettes. The 2002 National Smoking Prevalence
Survey estimated there to be about 300 million
current smokers in China.
1
The health and economic consequences of
smoking are alarming. A recent estimate of
mortality attributable to smoking in China is
673 000 deaths per year if limited to cancer, cardio-
vascular disease and respiratory disease.
2
And
because diseases caused by smoking can take several
decades to develop, China has yet to catch up to the
high smoking-related mortality seen in the West.
3
Smoking attributable deaths in China are projected
to rise to 2 million by the year 2020.
4
The health burdens of smoking also can be
measured in monetary cost, which includes medical
treatment costs (direct costs) and loss of
productivity from morbidity and mortality (indi-
rect costs). A study that used the 1998 China
National Health Services Survey estimated the
smoking-attributable total costs of three major
diseasesdcancer, cardiovascular (CV) disease and
respiratory diseasedat 41.0 billion RMB (or US$5.0
billion, US$1¼8.20RMB for the 2000 exchange rate)
measured in 2000 value, or about 208 RMB (US
$25.43) per smoker ($age 35).
5
The direct medical
costs of smoking accounted for 3.1% of Chinas
national health expenditures in 2000.
6
To reduce this cost burden in the future, effective
tobacco control programs and sustained efforts are
needed to curb the tobacco epidemic and economic
losses. One of the most important instruments
a government can use in tobacco control is taxa-
tion. Worldwide experience has shown that raising
the tax on cigarette sales is very effective in
reducing consumption.
3
The objectives of this paper are to identify key
economic issues for evidence-based policy analysis,
including the various aspects of tobacco taxation
and to recommend possible options for tobacco tax
reform in China.
The remainder of this paper is organised as
follows. The next section reviews the tobacco
economy in China. The third section provides
a review of Chinas tax system with particular
emphasis on the tobacco leaf tax and the cigarette
tax. The fourth section describes tobacco price,
affordability, consumption and demand analysis.
The fth section provides a simulation of the
impact of tobacco tax income on Chinas economy
and population health. Recommendations are
included in the nal section.
THE TOBACCO ECONOMY IN CHINA
The Chinese government plays an important role in
the production of tobacco leaf and cigarettes
through its national monopoly, the State Tobacco
Administration (STMA) and the China National
Tobacco Company (CNTC), one organisation with
two names. The STMA sets overall government
policy on tobacco, beginning with the allocation of
tobacco production quotas among the provinces,
the pricing of tobacco leaf, the setting of produc-
tion quotas for cigarettes and the managing of
international trade. The CNTC has the overall
responsibility of setting national tobacco leaf
production quotas for all provinces.
According to law, the CNTC is the only legiti-
mate buyer of tobacco leaf in China. In 2005, China
produced 2.435 million tons of tobacco leaf, about
one-third of the worlds production.
7
In the same
year, the 1.363 million hectares planted with
tobacco accounted for less than 1% of Chinas total
agricultural cultivated land. The gross value of ue-
cured tobacco was 23.23 billion RMB, or 9.54 RMB
per kg, contributing 1% to 2% to the Chinese
agricultural economy.
7
Currently, the Chinese central government
allows the local government to keep 20% of
tobacco leaf tax revenues. As a result, 24 of 31
provinces in China (about 4 million farm house-
holds or about 2% of all farmers) grow tobacco.
8
Almost all of these households also produce other
crops. Of the 24 tobacco-producing provinces,
1
Health Economics, University of
California, Berkeley, California,
USA
2
Center for International
Tobacco Control, Public Health
institute, Oakland, California,
USA
3
Department of Health
Economics, Sichuan University,
Chengdu, China
4
Research
Institute of Taxation Science,
State Administration of Taxation,
Beijing, China
5
Taxation Branch
Institute, State Administration of
Taxation, Beijing, China
Correspondence to
Teh-wei Hu, School of Public
Health, Room 241 University
Hall, University of California,
Berkeley, California 94720, USA;
thu@berkeley.edu
Received 22 May 2009
Accepted 29 October 2009
This paper is freely available
online under the BMJ Journals
unlocked scheme, see http://
tobaccocontrol.bmj.com/site/
about/unlocked.xhtml.
58 Tobacco Control 2010;19:58e64. doi:10.1136/tc.2009.031799
Research paper
Yunnan, Guizhou, Henan and Sichuan are the 4 most important
in terms of growing tobacco and manufacturing cigarettes.
According to the 2005 China Agricultural Statistics, the net
return for tobacco leaf compared to its production cost was 22%
for Yunnan and 18% for Henan, but only 1.25% for Guizhou and
4.98% for Sichuan.
9
These production costs included the
imputed cost of farmersown labour time, but not tobacco
company subsidies to farmers, which explains how a negative
return for Sichuan tobacco farmers is possible.
In 2007, Chinas state-owned tobacco monopoly produced
106.98 billion packs of cigarettes, generating a prot and tax of
388 billion RMB, about 7.56% of central government revenue.
10
The cigarette manufacturing industry employed about a half
a million people, or about 0.06% of the total national employ-
ment. About 3.5 million persons were engaged in retail cigarette
sales. However, very few persons were sole cigarette retailers and
many worked on a part time basis; they comprised 0.6% of the
total employed population in 2005.
8
China entered the World Trade Organization (WTO) in 2001.
With the WTO removing Chinas longstanding restrictions on
tobacco imports and the numerous domestic companies within
the state monopoly, thelargest Chinese tobacco company cannot
yet compete directly with the transnational tobacco companies.
In recent years, foreign products have set their product price
comparable to the most popular domestic brands, such as Hong
Ta Shan brand or Zhong Hua brand. The CNTC anticipates that
before the end of the decade, foreign products may reach 8% to
10% of the Chinese tobacco market.
7
To compete with the transnational tobacco companies,
CNTC has consolidated many regional companies to improve
efciency. One major consequence of these mergers is increased
unemployment. The 92 small cigarette companies that were
closed had about 59 000 employees and 5500 retired employees.
Chinese tobacco companies have begun addressing employment
issues in light of this industry restructuring.
THE TAX SYSTEM AND TAX STRUCTURE IN CHINA
China has a central government tax and a local government tax.
The central government collects a value-added tax (VAT),
personal and enterprise income tax, specic excise tax and
custom tax among others. The local government collects
a business tax, special tobacco leaf tax and city construction/
maintenance tax.
Even though the central government collects a large majority
of the taxes in China, revenue from some of the collected taxes is
shared with the local government. This revenue sharing provides
nancial incentives for the local government to collect taxes on
behalf of the central government. China has two tobacco-related
taxes: the tobacco leaf tax and the tobacco product (mainly
cigarette) tax.
Before 2005, tobacco leaf was included under the agricultural
tax, which was levied at 31% of the CNTC purchase price. The
revenue from this special agricultural tax was collected and used
for local government purposes. In 2006, the central government
decided to eliminate all agricultural product taxes to relieve
farmersnancial burdens. However, tobacco leaf was not included
in the tax exemption. Instead, a special tobacco leaf tax was
designed and the tax rate was reduced from 31% to 20%.
11
This
local tobacco leaf tax serves as an incentive for local ofcials to
encourage farmers to produce tobacco leaf above and beyond the
CNTC quota, which leads to a surplus of tobacco leaf, which then
becomes a source for underground private cigarette companies.
Before 1 May 2009, the cigarette tax rate in China consisted of
two components: (1) a specic excise tax of 0.06 RMB per pack
for all cigarettes and (2) an ad valorem tax of 45% for cigarettes
with a producer price higher than or equal to 5 RMB per pack
(class A cigarettes) and a 30% tax rate for cigarettes with a value
less than 5 RMB per pack (class B cigarettes).
In late May 2009, the Chinese Ministry of Finance (MOF) and
the State Administration of Taxation (SAT) announced an
adjustment to the cigarette product tax. While the specic excise
tax of 0.06 RMB per pack remained unchanged, the ad valorem
tax structure was changed as follows: (1) an ad valorem tax of
56% is levied on cigarettes with a producer price higher than or
equal to 7 RMB per pack (class A cigarettes) and a 36% tax on
cigarettes with a value less than 7 RMB per pack (class B ciga-
rettes), and (2) an additional 5% tax is applied to the whole
price, which includes the new increases in the producer price tax.
Table 1 provides a comparison of the Chinese tobacco tax
structure before and after May 2009. The government indicated
that the purpose of the new adjustment is to increase government
revenue from cigarette products. It requires the CNTC to absorb
all of the additional tax from its prots, not allowing the new tax
adjustment to be passed along to the retail level. Thus, the same
cigarette tax rate is maintained at the retail level in China.
Under the tax structure in effect before May 2009, the Chinese
government claimed that Chinas cigarette tax was about 65% at
the producer price level.
6
Using the t/(t+1) equation and a 65%
tax rate (t) at the producer price level, the cigarette tax rate in
China would be about 40% at the retail price level. International
practice calculates the cigarette tax at a retail price level to reect
consumersnancial outlay in buying cigarettes.
If the Chinese government were to pass along the additional
producer/wholesale tax increase to the retail price, the weighted
tax rate at the producer price level would be an additional 11.7
percentage points, assuming the recent mark-up between
producer price and wholesale price and the weighted sales value
distribution among the two classes of cigarettes.
12
Thus, the
adjusted tax rate at the producer price level would be 76.7% (65%
+11.7%), and the new retail price tax rate would become 43.4%
(76.7%/(1+76.7%)), an increase of 3.4 percentage points.
12
More
than 50 countries around the world have higher retail cigarette
tax rates than these effective tax rates in China.
13
To maintain sufcient local government revenue, the central
government transfers 25% of the VAT revenue to the local
government. Furthermore, the central government also transfers
40% of enterprisesincome tax revenues to the local government.
This form of tax revenue sharing provides an incentive to local
government to protect its local tobacco industry by controlling
tobacco leaf production, marketing and pricing. The national
tobacco monopoly industry becomes many localised monopolies.
One reason the Chinese government pays signicant atten-
tion to the tobacco industry is the latters contribution to the
central governments collected revenues. The CNTC is a govern-
ment-owned monopoly that combines its prot and tax revenue
as revenues. In 1995, the tobacco industry contributed about
11.4% of total central government revenue; its contribution
Table 1 Comparison of Chinese tobacco excise tax structure before and
after 1 May 2009
Before 1 May 2009 After 1 May 2009
Specific excise tax per pack 0.06 RMB 0.06 RMB
Ad valorem tax
Price per pack $5RMB 45% $7RMB 56%
Price per pack <5 RMB 30% <7RMB 36%
Wholesale price tax* 0% 5%
*Wholesale price includes the amount of ad valorem tax.
Tobacco Control 2010;19:58e64. doi:10.1136/tc.2009.031799 59
Research paper
declined to 7.56% in 2007. The recent fall in the proportion of the
tobacco tax to total tax is due to higher tax revenues from
Chinas burgeoning export market rather than any reduction in
tobacco production or manufacturing of tobacco products.
However, even though its relative share in government revenue
has been declining, the tobacco industry is still a very important
source of revenue for the central government in China.
PRICE, AFFORDABILITY, CONSUMPTION AND DEMAND
ANALYSIS
The price of cigarettes is a key variable when considering the use
of taxation as an instrument for tobacco control. In 1990, the
nominal retail price per pack of cigarettes in China was 1.088
RMB; it then increased gradually to 6.641 RMB in 2007, as
shown in table 2. According to the consumer price index (CPI),
using 1990 as 100, the overall price of cigarettes increased 2.28
times during that period; using the CPI to deate the nominal
cigarette price, the per pack price in 2007 measured at the 1990
price level, was 2.91 RMB per pack.
To address the affordability of cigarettes, one can divide per
capita disposable income by the price per pack of cigarettes each
year. Then, using the base year (1990) ratio as a denominator for
each subsequent year (eg, 1991, 1992 and so on), one can derive
an affordability index, a measure of price relative to income.
With rapid economic growth in China between 1990 and 2007,
the nominal proxy index of the per capita disposable income
increased from 1637 RMB in 1990 to 19 033 RMB in 2007, about
11.63 times. This increase in disposable income indicates that
Chinese consumersincome increased much faster than the price
of cigarettes, by almost 2.34 times between 1990 and 2007. Thus,
cigarettes in China became more than twice as affordable
between 1990 and 2007. As shown in table 2, given that the
relatively low increase in the real price has made cigarettes more
affordable over time, per capita cigarette consumption has been
increasing since 2000.
Demand analysis and price elasticity
Determining the impact of taxation on cigarette consumption
and subsequently on government revenue requires an analysis of
the relation between price and consumption of cigarettes. The
relationship can be expressed in quantitative measures. Price
elasticity is particularly important since it measures the effect
on consumption of a change in price.
Past empirical estimated price elasticities range widely from
0.007 to 0.84,
14e21
due mainly to variations in the data sets
(time series vs cross section; aggregate vs individual observa-
tions), model specication and estimated methods. However,
they can be grouped into three categories based on their magni-
tudes. (1) The high-end price elasticities, around 0.80, were
obtained from two time series studies.
14 15
Although interna-
tional literature often cites 0.80 as the price elasticity among
developing countries, it seems unlikely that Chinese smokers
would have such a high response to price change in the short
term; this could be a long-term price elasticity.
16
(2) The middle
range of elasticities, from 0.50 to 0.60, represents almost half
of all estimated results and is cited mostly in the literature from
middle-income or high-income countries.
17e19
(3) The low-end
price elasticities, from 0.007 to 0.154, are from the most
recent Chinese studies and based on much larger nationally
representative data sources.
20 21
One possible explanation for the
low price elasticity in China is the availability of cigarettes with
a wide range of prices, from 2.0 RMB (US$0.15) to 200 RMB (US
$24.4) per pack, suggesting that smokers can easily switch to
lower priced brands without quitting. Furthermore, due to the
rapid income growth in the Chinese economy, cigarettes have
become much more affordable, thus reducing the price effect.
Since the magnitude of price elasticity is one of the most
important parameters used to simulate the impact of a cigarette
tax on cigarette consumption, government revenue, population
health and the overall economy, we will use two different price
elasticities of 0.15 and 0.50 for a short-term tax impact
sensitivity analysis. The estimated elasticity of 0.15 of the
demand for cigarettes consists of two components: the probability
of being a smoker, that is, the participation elasticity was 0.06
and the price elasticity of the demand for the amount of cigarettes
conditional on being a smoker was 0.09.
21
Thus, approximately
40% of the decline in cigarette consumption in China was from
quitting (or not initiating) smoking, and 60% of the decline was
from current smokers reducing their consumption.
Table 2 Cigarette prices, affordability index and consumption (1990e2007)
Year
Nominal retail
price (RMB/pack)
Consumer price
index (1990[100)
Real retail cigarette
price (1990[100)
(RMB/pack)
Proxy disposable
income per capita
(RMB)
Affordability
index
Per capita consumption
(packs/year)
1990 1.088 100.0 1.088 1637 1.000 65.97
1991 1.207 103.4 1.168 1884 1.038 67.64
1992 1.328 110.0 1.207 2298 1.150 66.15
1993 1.421 126.2 1.126 2975 1.391 68.99
1994 1.564 156.6 0.998 4014 1.706 68.29
1995 1.736 183.4 0.946 4938 1.890 70.17
1996 1.944 198.6 0.979 5731 1.959 67.77
1997 2.177 204.2 1.066 6314 1.928 68.54
1998 2.316 202.5 1.144 6654 1.910 65.82
1999 2.464 199.7 1.234 7034 1.897 64.50
2000 2.585 200.5 1.289 7732 1.988 60.95
2001 2.793 201.9 1.383 8467 2.015 64.60
2002 3.086 200.3 1.541 9271 1.997 68.09
2003 3.420 202.7 1.687 10460 2.033 69.57
2004 3.899 210.6 1.851 12277 2.093 72.09
2005 4.522 214.4 2.109 14128 2.076 71.81
2006 5.384 217.6 2.474 16214 2.328 77.41
2007 6.641 228.0 2.913 19033 2.340 80.96
Sources: China’s Statistics Yearbook (1989e2008), China National Bureau of Statistics, Beijing, China; China Tobacco Statistics Yearbook (1989e2008), China National Tobacco Company,
Beijing, China.
60 Tobacco Control 2010;19:58e64. doi:10.1136/tc.2009.031799
Research paper
SIMULATION OF THE IMPACT OF SPECIFIC EXCISE TAX
INCREASES
Impact on cigarette consumption, government tax revenue and
health
Two different potential tax increases are used for the simulation:
(1) the new 43.4% tax rate that would result from the May 2009
tax adjustment structure if the producer tax adjustment was
passed on to the retail level by the Chinese government and (2)
an increase of 1 RMB per pack specic excise tax (currently less
than 0.06 RMB per pack), above and beyond the recent tax
adjustment, a more administratively effective strategy with
a potentially larger impact on tobacco control. The results
discussed below are shown in table 3.
(1) China sold 106.98 billion packs of cigarettes in 2007. Under
the new adjusted tax rate of 43.4%, the 2007 retail price of 6.64
RMB per pack would have increased to 6.87 RMB (or 0.23 RMB),
and 0.54 billion fewer packs would have been sold at 0.15 price
elasticity and 1.82 billion fewer packs sold at 0.50 price elas-
ticity. An additional 1 RMB excise tax would result in a reduction
in sales, respectively, of 3.0 billion packs and 9.96 billion packs.
Under a price elasticity of 0.15 and a smoking participation
elasticity of 0.06, the prevalence rate of smoking would be
reduced from 31% to 30.8% or from 308 million smokers to 307.37
million smokers, a reduction of 640,000 smokers with the passing
of the latest tax adjustment to the retail level. Using the estimated
epidemiology analysis reported by the Tobacco Atlas that indicates
one-third of smokers (a high estimate could be half of all smokers)
will die from tobacco-related illness,
13
a 3.4% tax increase would
mean 210 000 lives could be saved. At the same time, government
revenue would increase by an additional 22.58 billion RMB (US
$3.01 billion at US$1¼7.5 RMB, 2007 exchange rate).
At a price elasticity of 0.50 (ie, smoking participation elasticity
at 0.20, or 40% of 0.50) with a 3.4% tax increase, the prevalence
rate of smoking would be reduced further from 31% to 30.5%,
a reduction of 2.09 million smokers. If one-third of smokers will die
prematurely, about 700 000 lives could be saved. Total government
revenue could be increased by 19.63 billion RMB (US$2.62 billion).
(2) With an additional 1 RMB per pack increase, or at a retail
price of 7.87 RMB per pack under a total price elasticity of
0.15, smoking participation elasticity would be 0.06 and the
prevalence rate of smoking would be reduced from 31% to
30.13%, a reduction of 3.42 million smokers. Assuming one-third
of smokers will die from tobacco-related illness,
13
a 1.00 RMB
specic excise tax increase would mean 1.14 million lives could be
saved. At the same time, the total government cigarette tax
revenue would increase by 129.4 billion (or US$17.25 billion).
This same methodology also was used to estimate the impact
of adding an additional 1 RMB excise tax per pack of cigarettes
on cigarette consumption, health and government revenue
assuming a total price elasticity of 0.50 (ie, smoking partici-
pation elasticity at 0.20). In this scenario, the prevalence rate of
smoking would be reduced further from 31% to 28.13%,
a reduction of 11.41 million smokers. Again assuming one-third
of smokers will die from tobacco-related illness, an additional
1.00 RMB specic excise tax would mean 3.80 million lives could
be saved. The total government cigarette tax revenue would
increase by 101.8 billion RMB (US$13.57 billion).
Not included in table 3 are the potential cost savings in
medical services and increased productivity resulting from the
decreased number of smokers attributable to the increase in the
tobacco tax. Under the cost of smoking analysis,
4
per smoker
medical costs were about 200 RMB (US$26.67). If the Chinese
government decides to pass along the additional 3.4% tax to
smokers, 630 000 fewer smokers would result in savings of 126
million RMB (US $168 million) in medical costs when the price
elasticity is 0.15, or 418 million RMB (US55.7 million) when
the price elasticity is 0.50. If the specic excise tax is raised an
additional 1 RMB per pack, the resultant 3.42 million fewer
smokers would result in savings of 684 million RMB (US$92.2
million) in medical costs when the price elasticity is 0.15 and
2.28 billion RMB (US$0.30 billion) if the price elasticity is 0.50.
The indirect cost of smoking in China can be estimated using
the human capital approach, which is one method for evaluating
the monetary value of life years lost, based on average forgone
earnings of an individual as a loss of productivity to society.
5
The average per person loss of productivity due to premature
death would be 2935 RMB measured at the 2000 present value.
With 1.14 million lives saved with an increase of 1 RMB per pack
in the excise tax, productivity would increase by 3.34 billion
RMB (US$0.45 billion) at a price elasticity of 0.15. When the
price elasticity is increased to 0.50, the number of lives saved
would be 3.80 million and 10.27 billion (US$1.37 billion) would
be generated for the Chinese economy.
In summary, these simulation estimates indicate that a ciga-
rette tax increase in China would save lives, reduce medical care
costs and increase productivity.
Impact of cigarette tax increases on the cigarette industry and
tobacco farming
The Chinese governments concerns that an increase in cigarette
taxes will reduce cigarette consumption could have a minor
Table 3 The impact of cigarette tax increases on tobacco-attributable
mortality and government tax revenue using different price elasticities
2007
levels
Recent tax
adjustment
Increase in specific
excise tax of
additional 1 RMB
Increase in cigarette tax per pack (RMB)
Cigarette retail price (RMB/pack) 6.64 6.87 7.87
Producer price 3.98 3.98 3.98
Tax per pack 2.66 2.89 3.89
Total tax as % of retail price 40% 43.4% 50.6%
Reduction in cigarette consumption (billion packs)
0.15* 0.54 3.00
0.50* 1.82 9.90
Reduction in number of smokers (millions)
Price elasticitiesy
0.15 0.63 3.42
0.50 2.09 11.41
Number of lives saved (millions)z
0.15 0.21 1.14
0.50 0.70 3.80
Prevalence of adult (aged 15+)
current smokers (millions)
31%
0.15 30.8% 30.13%
0.50 30.5% 28.13%
Total number of current smokers
(millions)
308.0
0.15 307.37 304.6
0.50 305.91 296.6
Additional total tax revenues (billions RMB)
0.15 22.58 129.4
0.50 19.63 101.8
Total annual cigarette tax revenue (in US$)x
0.15 3.01 17.25
0.50 2.62 13.57
*Price elasticity.
ySmoking participation elasticity¼40% of the total price elasticity; smoking intensity
elasticity¼60% of the total price elasticity.
zAssuming one-third reduction in smokers.
13
xUS$1¼7.5 RMB for the 2007 exchange rate.
Tobacco Control 2010;19:58e64. doi:10.1136/tc.2009.031799 61
Research paper
effect on the cigarette industry, given the population expansion
in China even if per capita consumption decreases. The potential
short-term impacts of a tax increase can be simulated. When an
additional tax is levied on cigarettes, the immediate impact is
a reduction in sales, which will lead to a reduction in revenue
as well as employment in the cigarette industry. Under the
recent tax adjustment scenario, as shown in table 4, the reduc-
tion of cigarette consumption could be between 0.54 billion and
1.82 billion packs, depending on a price elasticity of 0.15 or
0.50. The industry sales revenue loss (based on 3.98 RMB per
pack 2007 producer price as shown in table 3) would be between
2.08 billion RMB and 6.86 billion RMB. Its employment loss
would be very minimal, between 279 and 936 persons. If an
additional 1 RMB excise tax were imposed, the industry total
sales revenue loss would be 11.94 billion RMB. Excluding the
production costs and tax contribution to the government, the net
loss to the industry would be 6.71 billion RMB in sales revenue,
only 0.52% (6.71/129.4) of the total additional revenue the
government would gain from the increased tax.
6
The average
prot of the cigarette manufacturing industry is 10.3% of
total revenue.
6
Thus, the loss of prot would be 691 million
RMB. Compared to the gain in government revenue of 129.4
billion RMB, the net loss to the cigarette industry would be
very small.
Under the assumption of a price elasticity of 0.50, with an
increase of additional 1 RMB per pack in excise tax, the reduction
in cigarette sales would be 9.90 billion packs. The average
producer cigarette price was 3.98 RMB; thus, the total gross sales
revenue loss would be 39.4 billion RMB, as shown in table 4. The
net industry loss would be 22.15 billion, and the net prot loss
would be 2.28 billion RMB.
If we consider employment as a linear function of production
volume, then a 1.6% loss of sales in the cigarette industry under
a price elasticity of 0.15, as shown in table 4, would result in
a drop in employment rates by the same percentage, or about 1606
employees. Under a price elasticity of 0.50, with a 5.3% loss of
sales, the employment loss would be 5382 employees. Compared
to the loss of 59 000 employees due to company merging, the
employment loss from an increase in taxes would be minimal.
An increase in tax and reduction in cigarette consumption
may provide further impetus to improve the efciency of ciga-
rette production. The effect of the reduction in cigarette
consumption could lead the cigarette manufacturing industry to
diversify into other products. Furthermore, the amount of
money that smokers save from reduced cigarette consumption
could be spent on food or household goods. Therefore, the net
effect on employment could be even smaller than estimated.
Studies in the USA, UK and Indonesia
22e24
using their national
input/output industry tables, showed that a cigarette tax
increase led to a gain in income and employment in other sectors
greater than the decline in the true tobacco sector.
Considering the loss of revenue for the cigarette industry and
income for industry employees, the government could grant
subsidies to the cigarette industry and their employees to retrain
workers displaced by higher tobacco taxes and transfer them to
other manufacturing industries as well as provide alternative
production opportunities, the same steps taken by the Chinese
tobacco industry during its restructuring.
One of the major concerns of the Chinese government with
respect to raising the tobacco tax is its potential negative
economic impact on tobacco farmerslivelihood. To estimate the
possible economic impact of a tobacco tax increase on tobacco
farming, one can rst examine the demand and supply relation-
ship between a reduction in the demand for cigarettes and the
magnitude of a cigarette price increase (ie, due to a tax increase).
Given the predicted reduction in the demand for cigarettes, one
can use a simple linear production relationship between the input
requirement (tobacco leaf) and a produced pack of cigarettes. One
can further simulate the monetary value lost from not producing
tobacco leaf by multiplying the average government purchase
price by the amount of tobacco leaf not sold in the market.
Chinese tobacco industry statistics indicate that 0.041 ton of
tobacco leaf is required to produce 1 case (or 50 000 pieces) of
cigarettes.
25
Thus, an additional 3.4% tax increase would lead to
a reduction in the need for 4.397 tons of tobacco leaf. An addi-
tional 1 RMB tax increase would lead to a reduction in the need
for 25 271 tons of tobacco leaf, as shown in table 4. Since the
impact of the recent tax adjustment on tobacco farming is very
small as shown in table 4, only simulation results for a 1 RMB tax
increase will be discussed here. The productivity relationship
between tobacco leaf and hectares is 1.81 tons per hectare.
25
Thus an additional 1 RMB tax increase would reduce land use for
tobacco farming by about 13 960 hectares, about 2% of total land
use. The reduction in tobacco leaf sales would reduce tobacco
farmersincome. The government purchase price for the middle-
grade tobacco leaf ranged from 755 RMB per 50 kg for tobacco
leaf from Yunnan and Guizhou provinces to 500 RMB (or top 505
RMB) for leaf from Northern Chinese provinces.
7
A 500 RMB
price was picked for the analysis so that this purchase price could
also be used to simulate the tax impact at the national level. The
Table 4 The impact of cigarette tax increases on the cigarette industry
and tobacco farming using different price elasticities
Recent tax
adjustment
Increase in specific excise
tax of additional 1 RMB
Impact on cigarette industry
Reduction in cigarette consumption (billion packs)
0.15* 0.54 3.0
0.50* 1.82 9.90
Total sales revenue loss (billion RMB)y
0.15 2.08 11.94
0.50 6.86 39.40
Industry net revenue loss (billion RMB)
0.15 1.17 6.71
0.50 3.85 22.15
Industry employment loss (number of employees)
0.15 279 1606
0.50 936 5382
Impact on tobacco farming
Reduction in tobacco leaf (in tons)x
0.15 4397 25271
0.50 14734 84677
Reduction in land use (in hectares){
0.15 2429 13960
0.50 8139 44778
Reduction in farmers’ revenue (in millions RMB)**
0.15 44 253
0.50 147 847
Reduction in local government tax (in millions RMB)yy
0.15 8.7 50
0.50 29.4 169
Notes:
*Price elasticity.
yTotal sales revenue loss is the producer price 3.98 RMB (6.64e2.66) RMB per pack
multiplied by the reduction in consumption.
zFigures obtained from table 2.
x0.041 tons of tobacco leaf prod uce 1 case of cigarettes (50 000 cigarettes).
6
{Average productivity is 1.81 tons per hectare.
**Average government purchase price was 500 RMB per 50 kg, 10 000 RMB per ton
(1 ton¼1000 kg).
yy20% special tobacco leaf tax.
62 Tobacco Control 2010;19:58e64. doi:10.1136/tc.2009.031799
Research paper
estimated revenue loss to farmers would be 253 million RMB
from an additional 1 RMB per pack tax increase. Compared to the
total national value of tobacco leaf sales, this revenue loss would
be about 2.0% of total tobacco revenue. Considering the cost of
producing tobacco leaf, the reduction in local government
revenue would be 50 million RMB nationally. In 2007, the local
government in China collected 4.646 billion RMB in local tax; the
reduction of 50 million RMB represents a loss of 0.30% of total
revenue. These losses could be replenished by the gain of 129.4
billion RMB in tax revenue by the central government.
In summary, an additional 1 RMB tax increase on cigarettes
would not have a serious effect on either tobacco farmersincome
or local government tax revenue. In fact, the alternative use of this
tobacco land could be even more benecial, based on farm
household survey results on costs and returns on tobacco leaf
production.
26
As shown in table 4, under the assumption of a price
elasticity of 0.50, a similar simulation can be estimated for an
additional 1 RMB specic excise tax increase per pack of cigarettes.
Again, farmers would use the land to produce other protable
crops. The central government would generate an additional 101.8
billion RMB, six times the loss of local government revenue. These
local government revenue losses could be easily compensated for
by the nancial gain of the central government.
Finally, one major concern raised by the Chinese government
is the regressivity of a tobacco tax increase. Low-income smokers
in China pay less per pack and smoke fewer cigarettes than high-
income smokers. Furthermore, low-income smokers are more
price responsive than high-income smokers. Therefore, the
savings from tobacco expenditures for low-income smokers
could be used for other household necessities, such as food,
clothing and housing, potentially leading to an improvement in
their general standard of living.
RECOMMENDATIONS
The Chinese government claims that its cigarette tax rate is
about 65% of the producer price, which is about 40% of the
retail price. Even if the recent tax adjustment is passed along to
the retail level, it is only 43.4% of the retail price. Thus, China
has room to raise the tax on cigarettes. The empirical economic
analysis and tax simulation results presented in this paper
clearly support the policy position that increasing the tobacco
tax in China is a most cost-effective instrument for tobacco
control. We therefore suggest the following recommendations.
Increase the cigarette tax
To achieve the goal of tobacco control, the Chinese government
should rst pass along its recent tobacco tax increase from the
producer/wholesale price to the retail price and then signi-
cantly increase the specic excise tax on cigarettes, which is
currently 0.06 RMB per pack by at least an additional 1 RMB per
pack. Raising the specic excise tax would narrow the dispersion
between low-end and higher-end brand prices and be an effective
tax instrument for tobacco control. In addition, the government
should simplify the current two-tier ad valorem tax into one
single rate to prevent producers from arbitrarily adjusting the
brand price to pay a lower tax rate. To maintain the effectiveness
of tobacco control, the specic excise tax should be adjusted by
the annual ination rate. In the long run, China should consider
increasing the overall tax rate beyond 60%, a gure common in
many other countries.
Remove the tobacco leaf tax
The Chinese government should consider removing the special
tobacco leaf tax. Because this is a recently established (2006) tax
category, the Chinese government may be reluctant to remove
the tax right away because of the immediate potential negative
scal impact on some local economic development projects.
However, the current pervasive incentive for local government
to encourage farmers to plant tobacco leaf leads to surplus
tobacco leaf, one of the major sources of counterfeit (tobacco)
cigarettes. Instead, the central government could increase the
cigarette tax and then transfer part of the additional cigarette
tax revenue to local government to compensate for its losses
resulting from the elimination of the special tobacco leaf tax. At
the same time, this strategy would free tobacco farmers to plant
any crop they desire. Some of the additional cigarette tax
revenue could be used by the Chinese government to subsidise
tobacco farmers wishing to substitute other crops for tobacco
leaf. Chinese Ministry of Agricultural and international organi-
sations such as Food and Agricultural Organisation (FAO)
should provide technical assistance for tobacco farmers on crop
substitution.
Reform revenue sharing between the central and local
government
The Chinese government should consider removing the tobacco
tax revenue sharing between the central government and the
local government and use the existing central government
revenue transfer mechanism between the central government
and local government to support local scal needs. In the future,
the contributions of the cigarette industry to government
revenue may become smaller, given the increasing importance of
multinational tobacco companies in the Chinese tobacco
market. The role of the Chinese central government should be to
pursue a more aggressive tobacco control strategy, consistent
with the World Health organization Framework Convention on
Tobacco Control (WHO FCTC) provision to increase the
tobacco tax, without worrying about tobacco control barriers at
the provincial level.
Earmark the additional tax revenue
The Chinese government should consider using the additional
cigarette tax revenue for tobacco control activities, such as
media antismoking campaigns, enforcement of non-smoking
legislation and coverage of healthcare expenses for the low-
income population. Many other countries, such as the USA,
Thailand, Australia, the UK and others have earmarked part of
their cigarette tax revenues for health insurance and health
promotion programs. The combined price and non-price tobacco
control campaigns will maximise Chinas efforts towards
tobacco regulation.
Acknowledgements The authors are grateful for the suggestions and comments
provided by Dr Tom Frieden, former New York Health Commissioner, Dr Kelly Henning
and Dr Julie Myers of the Bloomberg Initiative to Reduce Tobacco Use, Dr Frank
Chaloupka, Dr Hana Ross, Dr Emil Sunley and Dr Judith Mackay. We would like to
thank Dr Hai-Yen Sung of the University of California, San Francisco, who provided
simulation analyses for the demand model. This paper is condensed from a report
prepared for the Bloomberg Initiative to Reduce Tobacco UsedTobacco Taxation
What this paper adds
<This paper provides a concrete recommendation for tobacco
tax policy.
<It also provides comprehensive estimates of the impact of
a tobacco tax increase on the Chinese economy.
Tobacco Control 2010;19:58e64. doi:10.1136/tc.2009.031799 63
Research paper
and its Potential Impact in China (Teh-wei Hu, Zhengzhong Mao, Jian Shin, Wendong
Chen), December 2008.The authors remain responsible for the contents of the paper,
and the views expressed herein do not represent those of the authors’ affiliations.
Contributors T-wH designed the study and prepared the text. ZM analysed the data
and provided interpretations, while WC and JS collected data and reviewed findings.
Funding US National Institutes of Health, Fogarty International Center (R01-TW05938)
and the International Union Against Tuberculosis and Lung Disease.
Competing interests None.
Provenance and peer review Not commissioned; externally peer reviewed.
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Research paper
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To assess the hazards at an early phase of the growing epidemic of deaths from tobacco in China. Smoking habits before 1980 (obtained from family or other informants) of 0.7 million adults who had died of neoplastic, respiratory, or vascular causes were compared with those of a reference group of 0.2 million who had died of other causes. 24 urban and 74 rural areas of China. One million people who had died during 1986-8 and whose families could be interviewed. Tobacco attributable mortality in middle or old age from neoplastic, respiratory, or vascular disease. Among male smokers aged 35-69 there was a 51% (SE 2) excess of neoplastic deaths, a 31% (2) excess of respiratory deaths, and a 15% (2) excess of vascular deaths. All three excesses were significant (P<0.0001). Among male smokers aged >/70 there was a 39% (3) excess of neoplastic deaths, a 54% (2) excess of respiratory deaths, and a 6% (2) excess of vascular deaths. Fewer women smoked, but those who did had tobacco attributable risks of lung cancer and respiratory disease about the same as men. For both sexes, the lung cancer rates at ages 35-69 were about three times as great in smokers as in non-smokers, but because the rates among non-smokers in different parts of China varied widely the absolute excesses of lung cancer in smokers also varied. Of all deaths attributed to tobacco, 45% were due to chronic obstructive pulmonary disease and 15% to lung cancer; oesophageal cancer, stomach cancer, liver cancer, tuberculosis, stroke, and ischaemic heart disease each caused 5-8%. Tobacco caused about 0.6 million Chinese deaths in 1990 (0.5 million men). This will rise to 0.8 million in 2000 (0.4 million at ages 35-69) or to more if the tobacco attributed fractions increase. At current age specific death rates in smokers and non-smokers one in four smokers would be killed by tobacco, but as the epidemic grows this proportion will roughly double. If current smoking uptake rates persist in China (where about two thirds of men but few women become smokers) tobacco will kill about 100 million of the 0.3 billion males now aged 0-29, with half these deaths in middle age and half in old age.
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Objective: To re-estimate price elasticity of different income groups' demand for cigarette in terms of the lastest national tobacco consumption data and provide policy-makers with evidence to make decision on public policy of tobacco control. Methods: A total of 16 056 adults of different income were surveyed in 27 provinces in 2002 and the data analyzed by using two-part model (logistic and log-linear model). Results: We found that the demand elasticities were -0.589, -0.234, -0.017 and 0.247 for the poor group, low income group, middle income group and high income group, respectively. Conclusions: Increasing tobacco tax will result in decreasing more cigarette consumption of lower income groups than higher groups, bearing more taxation of higher income groups than lower income groups, therefore tobacco taxation is not regressive.
Article
To compare the new tobacco tax structure effective from May 2009 with the tax structure before May 2009 and to analyse its potential impact. Published government statistics and estimated price elasticities of the demand for cigarettes are used to estimate the impact of the new tax rate adjustment on cigarette consumption and population health. The new adjustment increased the tax rate by 11.7% points at the producer price level. Converting this 11.7% point increase to the retail price level would mean an increase of 3.4% points in the retail price tax rate. Thus, China's new cigarette tax rate at the retail level would be 43.4% instead of the previous 40%. The primary motivation for the recent Chinese government tobacco tax adjustment is to raise additional government revenue. Because the additional ad valorem tax has not yet been transferred to smokers, there is no public health benefit. It is hoped that the Chinese government will pass along these taxes to the retail price level, which would result in between 640,000 and two million smokers quitting smoking and between 210,000 and 700,000 quitters avoiding smoking-related premature death.
Article
National educational level, final consumption expenditure, average propensity to cigarette consumption (APCC) and cigarette price are adopted to research the regional and national aggregate cigarette demand of China. Under the condition that the effects of anti-smoking education in the Chinese current educational system are not remarkable, the theoretical model shows that cigarette demand will increase with the increase of national educational level. Empirical analysis points out that cigarette demand increases with the increase of educational level. Estimates also suggest that cigarette price, consumption expenditure and APCC will affect cigarette demand significantly, and that there are great differences for cigarette demand by region.
Article
Smoking is a risk factor for many diseases and has been increasingly prevalent in economically developing regions of the world. We aimed to estimate the number of deaths attributable to smoking in China. We conducted a large, prospective cohort study in a nationally representative sample of 169,871 Chinese adults who were 40 years of age or older. Investigators for the China National Hypertension Survey collected data on smoking and other risk factors at a baseline examination in 1991 using a standard protocol. Follow-up evaluation was conducted in 1999 and 2000, with a response rate of 93.4%. We used multivariable-adjusted relative risk, prevalence of smoking, mortality, and population size in each age group, stratified according to sex, to calculate the number of deaths attributable to smoking in 2005. There was a significant, dose-response association between pack-years smoked and death from any cause in both men and women after adjustment for multiple risk factors (P<0.001 for trend). We estimated that in 2005, a total of 673,000 deaths (95% confidence interval [CI], 564,700 to 781,400) were attributable to smoking in China: 538,200 (95% CI, 455,800 to 620,600) among men and 134,800 (95% CI, 108,900 to 160,800) among women. The leading causes of smoking-related deaths were as follows: cancer, 268,200 (95% CI, 214,500 to 321,900); cardiovascular disease, 146,200 (95% CI, 79,200 to 213,100); and respiratory disease, 66,800 (95% CI, 20,300 to 113,300). Our study documents that smoking is a major risk factor for mortality in China. Continued strengthening of national programs and initiatives for smoking prevention and cessation is needed to reduce smoking-related deaths in China.
Article
To determine whether declines in tobacco product sales significantly reduce employment in the United States, as the tobacco industry claims. Computer simulation of the economies of the Southeast Tobacco region and 8 nontobacco regions of the United States, with domestic tobacco expenditures eliminated or reduced and the equivalent spending redistributed, according to consumers' normal spending patterns. We compared these results with baseline forecasts of the regional economies that include normal tobacco expenditures. Number of jobs. Had there been no spending on tobacco products in the United States in 1993, the Southeast Tobacco region would have had 303 000 fewer jobs. Collectively, however, the 8 nontobacco regions would have gained enough employment to completely offset losses in the Southeast Tobacco region, with every nontobacco region gaining jobs. By the year 2000, the absence of tobacco spending would mean a loss of 222 000 jobs in the Southeast Tobacco region, but a gain of 355 000 throughout the rest of the country. In the more realistic scenario of doubling the downward trend in tobacco consumption, the Southeast Tobacco region would lose 6300 jobs in 1993 (0.03% of regional employment) and 36 600 jobs by 2000 (0.2%). The 8 nontobacco regions would gain 6400 jobs in 1993 and 56 300 jobs in 2000, with each of the nontobacco regions gaining employment in every year. Contrary to the tobacco industry's claims, reductions in spending on tobacco products will boost employment in every one of the 8 nontobacco regions and will not diminish employment in the Southeast Tobacco region by as much as the industry estimates. The primary concern about tobacco should be the enormity of its toll on health and not its impact on employment.
Article
To analyse a policy dilemma in China on public health versus the tobacco economy through additional cigarette tax. Using published statistics from 1980 through 1997 to estimate the impact of tobacco production and consumption on government revenue and the entire economy. These estimates relied on the results of estimated price elasticities of the demand for cigarettes in China. Given the estimated price elasticities (-0.54), by introducing an additional 10% increase in cigarette tax per pack (from the current 40% to 50% tax rate), the central government tax revenue would twice exceed total losses in industry revenue, tobacco farmers' income, and local tax revenue. In addition, between 1.44 and 2.16 million lives would be saved by this tax increase. Additional taxation on cigarettes in China would be a desirable public policy for the Chinese government to consider.