Using Compensating Variation to Measure the Costs of Taxing Cigarette in Iran

Abstract

Background: The impact of pricing strategies on different socioeconomic groups is not uniform. There is urgency in addressing of characteristics of household demand to make a policy choice in line with development goals. Objectives: This study was done to assess the effect of welfare loss from counterfactual tax-induced cigarette price increases on representative smokers by different expenditure quintiles in Iran. Methods: This analytical study was conducted using pooling cross-sections and compensating variation (CV) to evaluate the costs of taxing cigarettes. The data source used in our study was the Household Income and Expenditure survey (HIES) from 2001 - 2017. We did an almost ideal demand system (AIDS) analysis to estimate elasticities for cigarette demand and compute welfare losses from simulated cigarette price increases by socioeconomic groups. We used STATA version 15.1 (StataCorp, College Station, TX, USA), and Microsoft Excel 2016 to undertake the relevant analyses and estimates. Results: The highest loss was suffered by households of the poorest quintile, who should afford 1.41%, 2.47 %, and 3.20% more budget in the long-run, respectively, as the result of three simulated price increases to stay at the same well-being as before. Conclusions: Concerning direct welfare loss from the cigarette taxation reform in Iran, and focusing on low-income groups, such a policy can be considered as regressive. However, this regressivity can be reduced by informing strategies to redirect sin tax revenues that benefit the poor.