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Would raising tobacco tax in China unfairly burden the poor?

China is home to more than 300 million smokers, a substantial proportion of whom are male and low income, and who consume more than a third of the world’s cigarettes.

More than 1 million premature deaths each year in China are attributable to smoking,1 and the economic cost of smoking amounts to billions of dollars.2

Studies consistently show that raising tax on tobacco is the most cost-effective way to reduce tobacco use,3,4 yet China has so far hesitated to use such strategies in its bid to reduce tobacco use and its consequences. One of the concerns raised by the Chinese State Tobacco Monopoly Administration (STMA) is that a tax increase would lead to an unfair burden on the poor. Under the influence of the STMA, the Chinese government has kept tied tax rates on cigarettes—ie, lower rates on low-end cigarettes so as to keep them affordable for the poor, while generating revenues by taxing premium products at higher rates. However, in many countries, studies have disclosed that a tax increase along with raised tobacco product prices leads to the largest declines in smoking among the lowest income people, and that the burden of tax increase falls more heavily on higher-income consumers whose smoking behaviour changes little in response to the tax increase.5

It is in this context that the findings of a study in The Lancet Global Health6 have important implications for the tobacco tax and price policies in China, a country that has ratified WHO’s Framework Convention on Tobacco Control but has not significantly increased its tobacco excise taxes since 2009.

Stéphane Verguet and colleagues6 attempted to simulate the effect, across income quintiles, of a hypothetical tobacco price increase in China. Specifically, they estimated the health benefits (years of life gained), the additional tax revenues raised, the net financial consequences for households, and the financial risk protection provided to households caused by a 50% increase in cigarette prices through raising cigarette excise tax. Their goal is ambitious given the complex, yet not-well-understood,  mechanisms that link cigarette excise tax and various outcomes examined in this study, and the paucity of evidence to demonstrate the effectiveness of such a strategy in a rapidly changing economy like China’s, which is also the world’s largest tobacco producer and consumer.

The key contribution of this paper lies in its comprehensive exploration of the distributional consequences of increased tobacco taxation in China, a topic of significant policy and public health importance, but which few previous studies have explored. It is a Herculean effort to quantify the distributional effect of a tobacco price increase on public health, government tax revenue, and household financial soundness. While the method—extended cost-effectiveness analysis— used in this study has been validated and used in previous research, a model of such complexity inevitably involves reductions that may seem over-simplified and assumptions that are either unrealistic or not fully supported by existing evidence. For example, one of the key assumptions in this study is that the price elasticity for the low-income group is higher than that for the high-income groups. However, findings from recent studies show a disproportionate number of low-income Chinese smokers engaged in price-reducing purchase behaviours, mitigating the effect of a price increase. In fact, a recent study by ourselves (unpublished) found that the consumption elasticity of cigarettes was close to zero among low-income smokers in China, possibly due to price-reducing behaviours such as brand switching and trading down.

Additionally, the assumption that an increase in tobacco excise tax can be fully passed onto retail prices does not take into account the unique relationship between the tobacco monopoly and the government in China. The 2009 tobacco tax increase in China, for example, was shouldered by the tobacco monopoly.

Moreover, the assumption that there would not be any changes in household income and socioeconomic status after the tobacco price increase seems unrealistic given China’s rapid economic growth in the past few decades.

The increase in household income is one of the reasons that helped fuel the increase in cigarette consumption in China by increasing the affordability of cigarettes.

Employing a simplified model that encompasses various outcomes, which also requires many inputs, is a double edged sword. It can generate powerful predictions, but may also suffer badly when the model inputs are less than perfect.

That being said, the importance of the findings from this study should not be underestimated or shadowed by these potential methodological weaknesses. The key findings that a tobacco tax increase will generate huge health gains, billions of additional government tax revenue, and reduce expenditures on tobacco-related diseases, particularly for the low-income population, are of great policy, public health, and economic significance.

The paper shows that tobacco tax in China can reduce a significant proportion of the global burden of tobacco, and that tobacco tax increases are not necessarily regressive.

*Rong Zheng, Jidong Huang
School of International Trade and Economics, University of International Business and Economics, Beijing, China (RZ);
Institute for Health Research and Policy, University of Illinois at Chicago, Chicago, IL, USA (JH)

We declare no competing interests.

Copyright © Zheng et al. Open access article distributed under the terms of CC BY.

1 Peto R. Lopez AD. Future worldwide health effects of current smoking patterns. In: Everett Koop C, Pearson CE, Schwarz MR, eds. Critical issues in global health. San Francisco: Jossey-Bass, 2001: 154–61.
2 Yang L, Sung H-Y, Mao Z, et al. Economic costs attributable to smoking in China: update and an 8-year comparison, 2000–2008. Tob Control 2011; 20: 266–72.
3 WHO. WHO technical manual on tobacco tax administration. Geneva: World Health Organization, 2010.
4 Chaloupka FJ, Yurekli A, Fong GT. Tobacco taxes as a tobacco control strategy. Tob Control 2012; 21: 172–80.
5 International Agency for Research on Cancer. IARC handbooks of cancer prevention, tobacco control, volume 14: effectiveness of tax and price policies in tobacco control. Lyon: International Agency for Research onCancer, 2011.
6 Verguet S, Gauvreau CL, Mishra S, et al. The consequences of tobacco tax on household health and finances in rich and poor smokers in China: a cost-effectiveness and modelling analysis. Lancet Glob Health 2015; 3: e206–16.

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