The Tobacco Tax Increase and Household Welfare in Bosnia and Herzegovina

February 17, 2019 4:00 PM

The World Bank Office today in Sarajevo presented a study entitled ‘Time to quit: The tobacco tax increase and household welfare in BiH’.

Tobacco, a leading cause of death, is linked with high medical expenditures, lower life expectancy at birth, reductions in the quality of life, and other adverse effects.

Tobacco taxes are considered an effective policy tool to reduce tobacco consumption and produce long-run benefits that may outweigh the costs associated with a tobacco price increase. However, policy makers avoid using tobacco taxes because of the possible regressive effects.

In particular, poorer deciles across the income distribution are proportionally more negatively affected than richer ones by the extra tax burden. This paper uses an extended cost-benefit analysis to estimate the distributional effect of tobacco tax increases in Bosnia and Herzegovina.

The analysis considers the effect on household income of an increase in tobacco prices, changes in medical expenses, and the prolongation of working years under various scenarios, based on data in three waves of the national Household Budget Survey.

One critical contribution is a quantification of the impacts by allowing price elasticities to vary across consumption deciles. The results indicate that a rise intobacco prices generates positive income variations across the lowest income groups in the population (the bottom 20 percent).

At the same time, tobacco price increases have negative income effects among middle-income and upper-income groups.

These effects are larger, the higher the income level. If benefits through lower medical expenses and an expansion in working years are considered, the positive effect is acerbated among the lowest income groups. The middle of the distribution sees the income effect turn from negative to positive, and the top 40 percent, although continuing to experience a negative effect, see the magnitude of this effect diminish.

Altogether, these effects mean that increases in tobacco prices have a pro-poor, progressive effect in Bosnia and Herzegovina. These results also hold within entities and across urban and rural areas.

 

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