# **5. Results**

To analyze the distributional effects of an increase in tobacco taxes, the effect is estimated on prices, medical expenditures, and years of working life, aggregating these three indicators into a single measure. The price elasticities estimated in tables 2–4, including the lower- and upper-bound elasticities, facilitate an understanding of how the results could change under different assumptions.

## **Tobacco price increase**

Income changes that arise from an increase in tobacco prices are estimated for each decile based on lower-, medium-, and upper-bound elasticities. Using the price elasticities and the shares of household expenditure on tobacco by decile, the effects of an increase in tobacco prices can be simulated (see annex A, equation A2). To show the effect of the elasticities on prices, tables 9 and 10 also include estimates of a complete pass-through scenario, whereby the increase in prices is completely transferred to consumers without a reduction in consumption. For instance, if one assumes that the prices for tobacco products rise by 25 percent, given the medium-bound elasticity for clove cigarettes in the bottom decile (−0.64) in table 3 and the proportion of clove cigarette expenditures among the bottom decile (4.3 percent) in table 8, the expected decrease in household expenditures would be 0.36 percent (table 10).<sup>10</sup> This represents a loss in welfare because consumers would devote a higher share of their incomes to the purchase of the same amount of tobacco, thereby reducing the consumption of other goods. In contrast, the analysis for white cigarettes implies an overall smaller decrease, whereby, for example, the same medium-elasticity analysis for the first decile yields a 0 percent expected decrease in household expenditures. These results hold for all analyzed scenarios. The effect for white cigarettes appears to be relatively progressive, that is, it affects upper-income groups in a larger proportion, whereas, for clove cigarettes, the effect is U shaped, with an increasing effect from decile 1 through 6 that then reverses so that the top decile is less affected than the poorest decile (lower- and medium-bound elasticity cases; see figure 5 and table 10).

**Table 9 – Direct Effect of a Price Increase through Taxes, White Cigarettes (%)**

|_Price shock scenario_|_1_|_2_|_3_|_4_|_De_<br>_5_|_ciles_<br>_6_|_7_|_8_|_9_|_10_|
|---|---|---|---|---|---|---|---|---|---|---|
|Complete pass-through|−0.07|−0.11|−0.12|−0.15|−0.16|−0.17|−0.18|−0.19|−0.21|−0.14|
|Lower-bound elasticity|−0.02|−0.04|−0.05|−0.07|−0.07|−0.08|−0.09|−0.10|−0.11|−0.08|
|Medium elasticity|0.00|−0.01|−0.02|−0.03|−0.03|−0.04|−0.05|−0.05|−0.06|−0.05|
|Upper-bound elasticity|0.02|0.01|0.01|0.01|0.00|0.00|0.00|0.00|−0.01|−0.01|

_Source:_ Estimates based on Indonesia National Socioeconomic Survey 2016. _Note:_ The table shows the share of total consumption for each decile. Complete pass-through refers to elasticity equal to zero; consumers pay all the increased prices; and this does not affect the quantity purchased.

**Table 10 – Direct Effect of a Price Increase through Taxes, Clove Cigarettes (%)**

|_Pi hk i_|||||_De_|_ciles_|||||
|---|---|---|---|---|---|---|---|---|---|---|
|_rce soc scenaro_|_1_|_2_|_3_|_4_|_5_|_6_|_7_|_8_|_9_|_10_|
|Complete pass-through|−1.81|−2.09|−2.18|−2.22|−2.23|−2.14|−1.94|−1.70|−1.33|−0.67|
|Lower-bound elasticity|−0.81|−1.08|−1.22|−1.29|−1.34|−1.33|−1.23|−1.10|−0.88|−0.46|
|Medium elasticity|−0.36|−0.56|−0.67|−0.74|−0.79|−0.80|−0.75|−0.67|−0.55|−0.29|
|Upper-bound elasticity|0.09|−0.04|−0.13|−0.18|−0.23|−0.26|−0.26|−0.25|−0.21|−0.12|

_Source:_ Estimates based on Indonesia National Socioeconomic Survey 2016. _Note:_ The table shows the share of total consumption for each decile. Complete pass-through refers to elasticity equal to zero; consumers pay all the increased prices; and this does not affect the quantity purchased.

> 10 The analysis assumes the prices of both clove and white cigarettes increase by 25 percent. However, given the complex tobacco-tax structure in Indonesia, there may be a scenario whereby prices increase less for clove cigarette than for white cigarettes.

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