Effect of cigarette taxes on the consumption of cigarettes, alcohol, tea and coffee in Taiwan

Abstract

To analyse whether a health tax of 10 New Taiwan Dollars (NT$) (US$0.3) imposed on cigarettes in 2009 will help to reduce cigarette consumption, and whether or not the cigarette tax will affect consumption of alcohol, coffee and tea. Time series data for consumption and retail prices of tobacco, alcohol, tea and coffee were collected and analysed for the period 1973-2007. To establish the Central Bureau of Statistics demand function to estimate the overall demand price elasticities of cigarettes, alcohol, tea and coffee, a seemingly unrelated regression analysis was used. The independent variables were annual consumption of cigarettes, alcohol, tea and coffee. The dependent variables were prices of and expenditures on cigarettes, alcohol, tea and coffee. The estimated own-price elasticities for cigarettes and alcohol are close to -0.726. The own-price elasticities for tea and coffee are less than those for cigarettes and alcohol. Hence, it is predicted that the NT$10 health tax on cigarettes will reduce cigarette consumption by a significant 13.19%. Analysis of cross-price elasticity reveals that alcohol is complementary to cigarettes. Taxation is an effective smoking control policy tool that not only helps to reduce consumption of cigarettes, but also reduces consumption of alcoholic beverages.