Smoke Screen: Estimating the Tax Pass-Through to Cigarette Prices in Pakistan

IMF Working Papers, August 26, 2016

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Canonical URL: Smoke Screen: Estimating the Tax Pass-Through to Cigarette Prices in Pakistan

Estimates magnitude and speed of tax pass-through across tobacco products at different price points in Pakistan.
Uses a novel dataset of monthly observations on cigarette prices in 50 cities during the period 2004-2015.
Paper type: IMF Working Paper No. 2016/179, Pages: 14, Issue: 179, Volume: 2016, DOI: https://doi.org/10.5089/9781475530193.001, ISBN: 9781475530193, ISSN: 1018-5941.

Pass-through of cigarette taxes to retail prices is found to occur within two months.
Pass-through is mostly incomplete in magnitude.
On average, a one-rupee tax increase is estimated to lead to an increase of only PRs 0.8 in retail cigarette prices.
Tobacco manufacturers absorb a significant part of the tax increase.
For the premium brand, full passthrough is observed.
Findings suggest differences in demand elasticities across product tiers.
Results are likely attributable to competitive market pressures, especially at the budget end of the price spectrum, possibly stemming from changing consumption patterns with greater awareness of health risks as well as the impact of illicit domestic production.

Analysis based on monthly price observations across 50 cities for the period 2004-2015.
Focus on variation across tobacco products and price points to estimate magnitude and speed of tax pass-through.

Incomplete pass-through implies that tax increases are partly absorbed by manufacturers rather than fully reflected in retail prices, reducing the immediate price signal to consumers.
Full passthrough at the premium end indicates differentiated incidence across product tiers; policy measures may have heterogeneous effects by brand segment.
Competitive pressures and illicit domestic production may undermine the effectiveness of excise tax increases in raising retail prices and reducing consumption, particularly for budget brands.
Consideration of enforcement against illicit production and measures addressing market competition may be important complements to excise tax policy.

Source: Serhan Cevik, "Smoke Screen: Estimating the Tax Pass-Through to Cigarette Prices in Pakistan", IMF Working Papers 2016, 179 (2016).

Smoke Screen: Estimating the Tax Pass-Through to Cigarette Prices in Pakistan
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