Figure 1. Mechanisms from tobacco taxes to costs and benefits on household welfare <!-- Start of picture text --> Increasing<br>taxes on<br>tobacco<br><!-- End of picture text --> <!-- Start of picture text --> Increased<br>Government<br>revenues<br><!-- End of picture text --> <!-- Start of picture text --> Higher prices<br>of tobacco<br><!-- End of picture text --> <!-- Start of picture text --> Reduced<br>affordability of<br>tobacco<br><!-- End of picture text --> <!-- Start of picture text --> Improved fiscal<br>space for health<br>care and social<br>programs<br><!-- End of picture text --> <!-- Start of picture text --> Loss in<br>household<br>disposable<br>income<br><!-- End of picture text --> <!-- Start of picture text --> Maintain<br>disposable<br>(Complete income<br>pass-through)<br>Ambiguous<br>effect on<br>household<br>disposable<br>Reduce income<br><!-- End of picture text --> <!-- Start of picture text --> Smoker<br>consumption<br>decision<br><!-- End of picture text --> <!-- Start of picture text --> Improved<br>fiscal space<br><!-- End of picture text --> <!-- Start of picture text --> Ambiguous<br>effect on<br>household<br>disposable<br>• Lower<br>Reduce income<br>medical bills<br>(Incomplete pass-<br>through) Reduction in • Fewer premature<br>diseases burden deaths<br>of tobacco<br>• Fewer sick-days<br><!-- End of picture text --> <!-- Start of picture text --> Gain in<br>household<br>disposable<br>income<br><!-- End of picture text --> <!-- Start of picture text --> • Fewer premature<br>deaths<br><!-- End of picture text --> <!-- Start of picture text --> Gain in<br>household<br>earnings<br>potential<br><!-- End of picture text --> <!-- Start of picture text --> • Higher labor<br>productivity<br><!-- End of picture text --> _Source_ : Adapted from Postolovska, Lavado, Tarr and Verguet (2017).

Recent empirical applications use an Extended Cost Benefit Analysis (ECBA) framework to account for these mechanisms that translate higher taxes on tobacco to changes in welfare of the population.<sup>8</sup> By incorporating a more comprehensive view of the mechanisms, costs and benefits of increasing taxes on tobacco, these studies consistently find evidence against the arguments of regressive effects. Ten country studies published by the World Bank highlight that the medium- and long-term benefits of reducing cigarette consumption often outweigh the short-term costs of the tax, resulting in net income gains, particularly among lower-income groups (Fuchs and Del Carmen 2018; Fuchs, Del Carmen and Mukong 2018; Fuchs and Gonzalez Icaza 2019; Fuchs and Matytsin 2018; Fuchs and Meneses. 2017a, 2017b, 2018; Fuchs, Orlic and Cancho 2019; and a cross-country comparative analysis by Fuchs, Paz and Gonzalez Icaza, 2019). Consistently across countries, the net effects show a progressive pattern, often with long-term positive income gains for large sectors of the population and especially for poorer households. With the available data, the reduction in medical bills tends to be the most significant effect, suggesting a role for tobacco taxation (and other safety net programs) to protect households against catastrophic spending and impoverishment because of tobacco-related disease. The progressive distributional net effect is often driven by higher combinations of price-elasticities of demand and smoking prevalence rates, among poorer

> 8 The detailed methodology of the ECBA is explained in section IV.

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