Tobacco taxes are considered an effective policy tool to reduce tobacco consumptionand produce long-run benefits that outweigh the costs associatedwith a price increase. Through this policy, some of the most adverse effects andeconomic costs of smoking can be reduced, including shorter life expectancy,higher medical expenses, added years of disability among smokers, and theeffects of secondhand smoke. Nonetheless, tobacco taxes are often consideredregressive because low-income households tend to allocate a larger share oftheir budgets to purchasing tobacco products. This paper uses an extendedcost-benefit analysis to estimate the distributional effect of tobacco taxes onhousehold welfare in South Africa. The analysis considers the effect on householdincome through an increase in tobacco prices, changes in medical expenses, andthe prolongation of working years. Results indicate that a rise in tobacco pricesinitially generates negative income variations across all groups in the population.If benefits through lower medical expenses and an expansion in working yearsare considered, the negative effect is reduced, particularly in medium- andupper-bound elasticities. Consequently, the aggregate net effect is progressiveand benefits the bottom deciles more than the richer ones. Overall, tobaccotax increases exert a small, but positive effect in the presence of low conditionaltobacco price elasticity. If the population is more responsive to tobacco pricechanges (or participation elasticity estimates are included) then they wouldexperience even more gains from the health and work benefits. More researchis needed to clarify the distributional effects of tobacco taxation in South Africa.
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