Targeting the Affordability of Cigarettes: a New Benchmark for Taxation Policy in Low-income And-middle-income Countries

Objectives: To investigate the appropriateness of tax incidence (the percentage of the retail price occupied by taxes) benchmarking in low-income and-middle-income countries (LMICs) with rapidly growing economies and to explore the viability of an alternative tax policy rule based on the affordability of cigarettes.

Design: The paper outlines criticisms of tax incidence benchmarking, particularly in the context of LMICs. It then considers an affordability-based benchmark using relative income price (RIP) as a measure of affordability. The RIP measures the percentage of annual per capita GDP required to purchase 100 packs of cigarettes. Using South Africa as a case study of an LMIC, future consumption is simulated using both tax incidence benchmarks and affordability benchmarks.

Results: I show that a tax incidence benchmark is not an optimal policy tool in South Africa and that an affordability benchmark could be a more effective means of reducing tobacco consumption in the future.

Conclusions: Although a tax incidence benchmark was successful in increasing prices and reducing tobacco consumption in South Africa in the past, this approach has drawbacks, particularly in the context of a rapidly growing LMIC economy. An affordability benchmark represents an appropriate alternative that would be more effective in reducing future cigarette consumption.