# **6. Discussion**

Despite the wealth of research on the negative effects of tobacco consumption and on the benefits of various public policy mechanisms aimed at reducing tobacco use, questions remain about the progressivity or regressivity that these entail. To assess the net welfare gains generated by such a policy, one must look beyond the direct impact on household incomes and consider other benefits of lower tobacco consumption, including the reduction in medical costs and the increase in the potential working years associated with good health.

Applying this comprehensive approach to a sample of eight middle-income countries, the analysis shows that indirect benefits can offset the direct income losses caused by the taxes on tobacco. Considered by itself, a price increase in tobacco through higher taxes generates negative welfare shocks. However, behavioral responses in the form of price elasticities mediate these results and can encourage higher quitting rates among poorer households. As individuals cut down tobacco consumption, reductions in medical expenditures and gains in potential working years also work to offset direct negative income shocks. In the case of large price shocks, the aggregate benefits of tobacco taxes far exceed the greater tax liabilities and produce progressive effects. These results are in line with findings in the literature, highlighting that the critical benefits of reducing tobacco use may emerge through diverse policy mechanisms. In the long term, the benefits of nonsmoking outweigh the losses attributed to tobacco taxes across a population and, specifically, among lower-income groups.

The eight countries under study—Bangladesh, Bosnia and Herzegovina, Chile, Indonesia, Moldova, Russia, South Africa, and Ukraine—account for 700 million people, close to a 10th of the global population. They range from lower-middle-income countries (Bangladesh, which has the lowest GDP per capita in the sample) to upper-middle-income countries (Russia and Chile, which lead in GDP per capita). They also represent 15 percent of the smoking prevalence in the world.<sup>5</sup> Almost three adult men in five ages above 15 living in these countries report that they smoke. One woman in 10 in these countries smokes. On average, health expenditures account for 6.7 percent of GDP in these countries, which collect only 17 percent of GDP as tax revenue.<sup>6</sup> A back-of-the-envelope estimation under the medium-bound elasticity scenario suggests that raising the price of cigarettes by 50 percent would allow around 350 million people (50 percent of the population in these eight countries) to capture positive household income gains on top of other potential social benefits from the greater public revenue. In some countries, the entire population could potentially see modest positive income effects. Higher elasticities in the longer term and more decisive price shocks would boost the number of beneficiaries. However, some heterogeneity in the results under the lower price shocks and the lower-bound elasticity scenarios and in some countries (especially Indonesia and South Africa) call for caution and careful analysis in implementing policy interventions.

> 5 2016 data of WDI (World Development Indicators) (database), World Bank, Washington, DC, http://data.worldbank.org/products/wdi.

> 6 2016 data of WDI (World Development Indicators) (database), World Bank, Washington, DC, http://data.worldbank.org/products/wdi.

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