In the European Union (EU), approximately 700,000 people die of smoking-related diseases every year. The reduction of tobacco consumption has thus become one of the major social policies of the EU.
The tobacco control policies (MPOWER) proposed by the World Health Organization (WHO) in 2008 serve as a guideline for the health authorities of the EU member states. The six MPOWER measures mandate (i) increases in the tobacco tax; (ii) monitoring of tobacco usage; (iii) support for quitters; (iv) creation of a smoking-free environment; (v) warning against the dangers of tobacco; (vi) and banning tobacco advertising, promotion and sponsorship.
Numerous empirical studies have demonstrated that most consumers, when confronted with higher retail prices, indeed reduce consumption.
Among the MPOWER measures, taxation is the most common single policy tool to control tobacco use. Economic theory suggests that increasing tobacco taxes will result in higher direct costs for smokers and thus lower consumption.
Theoretically, the tobacco industry could absorb the additional costs to prevent higher retail prices, but, in reality, increased costs are passed on to the consumers. Numerous empirical studies have demonstrated that most consumers, when confronted with higher retail prices, indeed reduce consumption, while others switch to lower-priced products or turn to smuggled goods.
Modeling a 10% tax increase
In our study, we estimated the effects of a hypothetical cigarette price increase of 10% on consumption, tax revenues and death toll of smoking in 28 EU countries.
Unlike previous studies, our statistical model also accounted for the fact that income affects the responsiveness of consumers to price changes. Research has shown that smokers with high disposable income are less affected by rising cigarette prices than those with lower income. In other words, the price elasticity of demand changes with income (income threshold effect).
The price elasticity of demand is used to measure changes in demand of goods in response to changes in price. It gives the percentage change in quantity demanded in response to a one percent change in price.
Our statistical model separates the observed 28 countries into three income clusters (regimes), assuming that all of the countries within a cluster have about the same response patterns to price increases. Using data for the years 2005 to 2014, our model estimated the price elasticity of each income cluster.
Nicotine use would be reduced by 12.27% in Bulgaria and Romania; by 8.29% in Latvia and Poland; and by 5.03% in the EU24 countries.
Based on the elasticity figures, we were able to estimate the possible effects of a hypothetical price increase of 10% on consumption, tax revenues and the number of averted smoking-attributable deaths. The latter figure derived from the simulated impact of price increments on the reduction in smokers and was adjusted for the fact that smoking cessation still carries considerable risks of early death.
The results of our study revealed that higher taxation would be considerably more effective in reducing consumption as well as incidences of smoking-related deaths in the two less developed regimes than in the remaining 24 countries (EU24) belonging to the third income regime. Specifically, nicotine use would be reduced by 12.27% in Bulgaria and Romania; by 8.29% in Latvia and Poland; and by 5.03% in the EU24 countries.
Unlike other measures, such as bans on tobacco advertising, taxation not only effectively decreases tobacco consumption but, in general, also has the beneficial side effect of increasing national tax revenues. Our simulation showed that although tax revenues increased by 7.03% in Latvia and Poland, and by 3.15% in the EU24 area, revenues dropped by 1.41% in the least developed countries, Bulgaria and Romania.
Different policies for different countries
What are the policy implications? As the results of the study show, there are three income regimes among the observed 28 European countries. Since each regime is differently affected by cigarette taxation, different policies must be adopted to fight nicotine use. Specifically, other measures to control tobacco use, such as restrictions on advertisements, pictorial warning labels and cessation assistance, are necessary in high-income countries to compensate for the income threshold effect.
Moreover, as the study has shown, higher taxation leads to significant increases in tax revenues in high-income regimes, but in poorer countries it is more likely to lead to considerable losses in tax revenues. Health authorities in less developed countries may thus lack crucial funding to implement anti-smoking measures. External funding (donations from other European countries) would thus be required to ensure success in combating cigarette use.
Illicit trade of tobacco products has not been included in the study, as reliable data could not be obtained for all countries. Moreover, data on cigarette consumption analysed in this study refer to factory-made (FM) cigarettes. Roll-your-own (RYO) tobacco products have become popular in the EU in recent years and may influence consumption behavior. Further research on price effects may thus address the issue of illicit trade and RYO cigarette use.