Background: This study uses cigarette price elasticity to evaluate the effect of a new excise tax increase on cigarette consumption and to investigate responses from various types of smokers.
Methods: Our sample consisted of current smokers between 17 and 69 years old interviewed during an annual face-to-face survey conducted by Taiwan National Health Research Institutes between 2000 to 2003. We used Ordinary Least Squares (OLS) procedure to estimate double logarithmic function of cigarette demand and cigarette price elasticity.
Results: In 2002, after Taiwan had enacted the new tax scheme, cigarette price elasticity in Taiwan was found to be -0.5274. The new tax scheme brought about an average annual 13.27 packs/person (10.5%) reduction in cigarette consumption. Using the cigarette price elasticity estimate from -0.309 in 2003, we calculated that if the Health and Welfare Tax were increased by another NT 3 dollars per pack and cigarette producers shifted this increase to the consumers, cigarette consumption would be reduced by 2.47 packs/person (2.2%). The value of the estimated cigarette price elasticity is smaller than one, meaning that the tax will not only reduce cigarette consumption but it will also generate additional tax revenues. Male smokers who had no income or who smoked light cigarettes were found to be more responsive to changes in cigarette price.
Conclusions: An additional tax added to the cost of cigarettes would bring about a reduction in cigarette consumption and increased tax revenues. It would also help reduce incidents smoking-related illnesses. The additional tax revenues generated by the tax increase could be used to offset the current financial deficiency of Taiwan's National Health Insurance program and provide better public services.