# IX. Welfare simulations

The net income gains from increasing taxes on tobacco could contribute to poverty reduction efforts in Georgia. <u>Table 9</u> shows the simulated reductions in the number of poor people in 2017, based on international poverty lines (US$1.90 and US$3.20 per capita per day, PPP 2011). Using the more relevant poverty measure for Georgia—the <mark>lower middle income class poverty line of</mark> US$3.20 PPP—and considering only out-of-pocket medical expenses, a 50 percent increase in the price of cigarettes could have reduced poverty by 4.2 thousand people in 2017. Implementing an equivalent _specific_ excise tax (assuming scenario c) could have lifted close to 7 thousand Georgians out-of-poverty in the same year. These projected reductions in poverty are only indicative of potential improvements in household welfare resulting from the tax increase in isolation. Additional channeling of tobacco revenues to poor households or improved government funding for health and social programs could reduce poverty further.

Table 9. Simulated changes in poverty, 2017

||Simulated scenar<br>Cigarette price increase|io<br>Smoking-related<br>medical expenses|Reduction in numb<br>by internation<br>US$1.90 PPP/day|er of poor people,<br>al poverty line<br>US$3.20 PPP/day|
|---|---|---|---|---|
|(a)|50 percent uniform price<br>increase|Out-of-pocket only|1,781|4,210|
|(b)|50 percent uniform price<br>increase|All medical expenses|4,276|5,750|
|(c)|Heterogenous price increase<br>(average 47percent)*|Out-of-pocket only|5,600|6,924|

_Source:_ Author estimations with results from section VIII, based on data from the IHS 2012-2016, HIES 2017, GBD (2016), Goodchild et al. (2018) and WDI. _Note:_ *Estimation using a price shock of 100% for deciles 1 to 2, 36% for deciles 3 to 8, and 25% for deciles 9 and 10.

# X. Discussion

<mark>The negative health and economic consequences of smoking are a major policy concern in Georgia. In a context of demographic pressures, high public and private expenses in of the health care system, and efforts to maintain fiscal balance (World Bank 2018a), tobacco consumption generates high social and economic burdens. By reducing the consumption of tobacco, individuals observe health benefits, that translate—among many other benefits—to reductions in medical expenses and in the years of productive life that would be lost due to smoking-related premature deaths. This paper uses empirical estimations of the price elasticities of demand by income decile and applies the extended-cost benefit analysis model to account for those—often disregarded—economic benefits of tobacco taxation in the case of Georgia. Different price-shocks and elasticity scenarios are simulated, to grasp on the short-, medium- and long-</mark> term effects of a tobacco tax reform.

<mark>The results contribute to the international evidence that increasing taxes on tobacco can bring significant welfare and equity benefits. In contrast to a naïve (complete pass-through) estimation that neglects the behavioral response of smokers to price changes—and consistent with extensive evidence for other countries—the results confirm that lower-income households in Georgia have higher price elasticities of</mark> 23