# **1. Introduction**

The World Health Organization (WHO 2017) estimates that tobacco kills more than 7 million people worldwide each year. It is the second leading cause of death and disability worldwide (Ng et al. 2014) and is among the major preventable causes of disease and premature death globally (Doll and Hill 1956; Wynder and Graham 1950). Diseases associated with tobacco use include lung cancer, stroke, ischemic heart disease, and respiratory diseases (HHS 2004).

Among tobacco control policies, tobacco taxes are generally considered the most efficient policy intervention to reduce tobacco consumption (World Bank 1999). Evidence suggests that higher taxes are responsible for almost half the decline in smoking (WHO 2014). By increasing prices and reducing the affordability of tobacco, taxes encourage current smokers to quit and discourage potential consumers to initiate. They also contribute to raising government revenues and to reducing the risks of secondhand smoking. Nonetheless, policy makers often hesitate to increase taxes on tobacco because of claims of the potentially regressive impact, that is, as the prices of tobacco increase, the poor could suffer proportionally larger negative effects. However, in addition to health benefits, taxes bring about medium- and long-term economic benefits among households that are often overlooked, including higher labor productivity and fewer medical bills. Analyzing the burden of tobacco across the population and assessing the distribution of these health and economic benefits are essential to assessing the overall welfare effects and distributional impacts of raising the taxes on tobacco.

Most studies on the economic burdens of tobacco have been concentrated in higher-income countries. Yet, nearly 80 percent of the world’s smokers live in low- and middle-income countries (WHO 2015a). Developing countries are already burdened by 40 percent of the total economic costs of smoking (Goodchild, Nargis, and Tursan d’Espaignet 2018). This study reports on a comparative analysis of the distributional impact of raising taxes on tobacco products in eight countries: Bangladesh, Bosnia and Herzegovina, Chile, Indonesia, Moldova, South Africa, the Russian Federation, and Ukraine.

This is a first attempt to carry out a cross-country comparative analysis on the distributional welfare effects of tobacco taxation using household consumption microdata and including a sample of eight countries. The study applies a standardized extended cost-benefit analysis (ECBA), and, to aim for methodological consistency, it relies on the same sources of data across the sample.<sup>2</sup> In line with the findings in the literature, the ECBA methodology allows for differentiated behavioral responses to the price changes in tobacco by examining decile-specific price elasticities of demand. It accounts for both the direct price shock on household budgets and the indirect welfare gains of rising cigarette prices, as the improved health outcomes derived from reduced smoking translate into lower medical expenses and fewer premature deaths among workers. Finally, it simulates medium-, upper-, and lower-bound elasticity scenarios to account for shorter- and longer-term consumption changes and welfare effects.

The results show that, in the short run, the direct price shock negatively affects lower-income households more than the more well-off peers. In most countries, this regressive effect is driven

> 2 The World Bank has published country-specific studies on the distributional incidence of tobacco taxation (see Fuchs and Del Carmen 2018; Fuchs, Del Carmen, and Genoni 2018; Fuchs, Del Carmen, and Mukong 2018; Fuchs and Matytsin 2018; Fuchs and Meneses 2017a, 2017b, 2018; Fuchs, Orlic, and Cancho 2019). However, these studies rely on country-specific data sources with some methodological variation.

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