This paper assesses the welfare anddistributional effects of raising taxes on tobaccoinVietnam. Tobacco taxes are recognized as effective policytools to reduce tobaccoconsumption and to improve healthoutcomes. However, policy makers often hesitateto use thembecause of claims of their potentially regressive effects.According to thoseclaims, poorer households are particularlyhurt by tobacco tax policies, as cigarettepurchasesrepresent a larger share of their budgets relative tohigher-income smokers.The paper argues that the claims onthe regressive effects of tobacco tax policies arebased onnaive, shortsighted, and incorrect estimations.Tobacco-related illnessesdamage health outcomes and thequality of the lives of smokers and their families,whilethey also cost billions of dollars in medicalexpenditures and losses in human capital andproductivityevery year. Tobacco consumption imposes heavy economicburdens onhouseholds and governments, in addition to itswell-known negative health and socialimpacts. Raising taxeson cigarettes dissuades consumption, hence improvinghealthoutcomes, adverting premature deaths, and reducingdirect and indirect economic costs.The analysis applies theExtended Cost Benefit Analysis (ECBA) methodology tosimulateempirically the costs, as well as the benefits ofincreasing the prices on cigarettes onthe welfare ofVietnamese households. Following a well-established body ofliterature,the ECBA acknowledges that there may beshort-term direct negative effects of raisingprices ontobacco, as smokers can struggle to continue to purchasetobacco with theirunchanged household budgets. However, themodel also incorporates two of the mainbenefits of reducingtobacco consumption by increasing taxes: (a) the reductioninsmoking-related medical expenses borne by households and(b) the additional incomesthat households can earn bypreventing years of productive life lost due to smokingattributablepremature deaths. A critical contribution of theECBA is to incorporate decile-specific price elasticities ofdemand for cigarettes, to quantify the behavioral responsesor sensitivity of smokers in different income groups tochanges in cigarette prices. To the knowledge of theauthors, this is the first available empirical exercise toestimate price elasticities by income decile in Vietnam.Consistent with the literature and with empirical findingsin other countries, the price elasticities of demand forcigarettes are larger for lower-income households. Lowerincome smokers are likely to reduce their tobaccoconsumption more drastically, when faced with a priceincrease. The ultimate distributional effect on welfare ofthe increasein the price of cigarettes due to tax increaseswill then depend on assessing the potentialbenefits againstthe short-term costs.
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