metadata: authors: 0: author: Fuchs Tarlovsky,Alan
1: author: Meneses Ponzini,Francisco Juan Alberto
count: Moldova
docna: 0: docna: Tobacco price elasticity and tax
            progressivity in Moldova
docty: Policy Research Working Paper
subtopic: Health Care Services Industry,Disease Control & Prevention,Public Health Promotion,Tobacco Use and Control,Cancer
teratopic: Industry,Science and Technology Development,Health, Nutrition and Population
abstracts: cdata!: Tobacco-use–related diseases are the
            main cause of mortality in Moldova, where tobacco
            consumption is widely spread, especially among men. In
            addition to health concerns, tobacco consumption has
            economic consequences, as households spend substantial
            resources on tobacco and related out-of-pocket medical
            costs. Tobacco tax increases are one of the most effective
            measures to reduce tobacco consumption, but are usually
            believed to be regressive, taxing the poor proportionally
            more than the rich. This paper estimates the tobacco price
            elasticity of demand for Moldova by income decile and
            undertakes an extended cost-benefit analysis to estimate the
            distributional effect of a rise in tobacco taxes on income
            distribution. The paper's main findings are that a
            tobacco price increase would generate a rise in expenditure
            deriving from direct tobacco price increases, but would
            reduce the costs of out-of-pocket medical expenses. Based on
            these two factors, the net effect of a tobacco tax increase
            would be progressive in the analyzed cases, ultimately
            benefitting the incomes of the lower-income groups in the population.
geo_reg_key: 517208,517191,82689
repnme: repnme: Tobacco price elasticity and tax
            progressivity in Moldova
display_title: Tobacco price elasticity and tax
            progressivity in Moldova
listing_relative_url: /research/2018/02/29555262/tobacco-price-elasticity-tax-progressivity-moldova
topicv3: Cancer m1326342 1431,Tobacco Use and Control m1326794 1439,Heart Disease m1327525 1434,Health m1504661 3480,Tobacco Taxes m1504803 3496
publishtoextweb_dt: 2018-02-01T00:00:00Z
historic_topic: Industry,Science and Technology Development,Health, Nutrition and Population
no_of_pages: 25
author_keys: 0: author_key: 1107738
1: author_key: 1407696
model_extractions: WPS8327 Policy Research Working Paper 8327 Tobacco Price Elasticity and Tax Progressivity in Moldova _Alan Fuchs Francisco Meneses_ Poverty and Equity Global Practice Group February 2018
Policy Research Working Paper 8327

# **Abstract**

Tobacco-use–related diseases are the main cause of mortality in Moldova, where tobacco consumption is widely - spread, especially among men. In addition to health con cerns, tobacco consumption has economic consequences, as households spend substantial resources on tobacco and related out-of-pocket medical costs. Tobacco tax increases are one of the most effective measures to reduce tobacco consumption, but are usually believed to be regressive, taxing the poor proportionally more than the rich. This paper estimates the tobacco price elasticity of demand for Moldova by income decile and undertakes an extended cost-benefit analysis to estimate the distributional effect of a rise in tobacco taxes on income distribution. The paper’s main findings are that a tobacco price increase would generate a rise in expenditure deriving from direct tobacco price increases, but would reduce the costs of outof-pocket medical expenses. Based on these two factors, the net effect of a tobacco tax increase would be progressive in the analyzed cases, ultimately benefitting the incomes of the lower-income groups in the population.

This paper is a product of the Poverty and Equity Global Practice Group. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The authors may be contacted at afuchs@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# **Tobacco Price Elasticity and Tax Progressivity in Moldova**

Alan Fuchs and Francisco Meneses<sup>1</sup> JEL Codes: H23, H31, I18, O15

> 1 Fuchs: Poverty and Equity Global Practice, World Bank, 1818 H Street NW, I 4-405, Washington, DC 20433 (email: <u>afuchs@worldbank.org). Meneses: Duke University (email: fjmeneses@gmail.com). Irina Guban, contributed with the collection of</u> health data. Support for the preparation of this report was provided by the World Bank’s Global Tobacco Control Program, cofinanced by the Bill and Melinda Gates Foundation and Bloomberg Philanthropies. The authors are grateful to Luis Felipe Lopez-Calva, Oscar Calvo-Gonzalez, Patricio Marquez, Maria Eugenia Genoni, Olena Doroshenko, Sheila Dutta, Gabriela Inchauste and Alexandru Cojocaru for providing comments and support for this paper. The findings, interpretations, and conclusions in this research are entirely those of the authors. They do not necessarily represent the views of the World Bank Group, its Executive Directors, or the countries they represent.
# **1. Introduction**

Tobacco is one of the major causes of noncommunicable disease in the world. It has been associated with many types of cancers, including lung, oral, laryngeal, pancreatic, kidney, cervical, and acute myeloid.[1] Tobacco consumption is also associated with respiratory problems such as chronic respiratory symptoms, tuberculosis, influenza, pneumonia, other infections, chronic bronchitis, emphysema, and asthma. Furthermore, tobacco consumption has been proven to influence cardiovascular diseases, such as aneurysms, strokes, and coronary heart disease, as well as adverse reproductive and developmental effects, such as low birthweights, congenital malformations in babies, and complications in pregnancy, along with sexual dysfunction among men.[1, 2] In Moldova, the average age of individuals when they start smoking is slightly less than 18 years, and the average smoker spends over 20 years consuming cigarettes. Aside from the health effects, tobacco has significant economic impacts because it accounts for approximately 1 percent of monthly household budgets and is a relevant factor in the expenditures on health treatments. This paper presents estimates of the tobacco price elasticity in Moldova and the distributional effects of a tobacco tax increase across income deciles.

Moldova is a small lower-middle-income country, with a population slightly above 3.5 million people, and a GDP per capita slightly below US$2,000. It is one of the poorest countries in Europe, with a poverty rate of 9.6 percent measured under the national poverty line with a GINI coefficient of 0.27.[3] The main causes of death in Moldova are diseases of the circulatory system, followed by cancers and diseases of the digestive system. Many of these deaths can be attributed to heavy alcohol and tobacco consumption: 57.6 percent of total male mortality and 62.3 percent of female mortality in 2010 could be attributed to smoking-related causes, while 18.8 percent of male mortality and 13.7 percent of female mortality were related to alcohol consumption.[4] Based on the current level of adult smoking in Moldova, premature deaths attributable to smoking are projected to be as high as 397,000 among the 794,000 smokers alive today.[5] The majority of these deaths are a result of respiratory diseases, strokes, heart disease, and lung cancer.[5] Life expectancy in Moldova is 10 years lower than the European Union (EU) average, and life expectancy is five–six years less among men than women. The health care costs associated with tobacco make up 7.6 percent of the total health expenditures in the Unites States.[2] The negative health and economic impacts of tobacco highlight the importance of tobacco tax policies that could reduce consumption in Moldova.

Tobacco taxation is one of the best ways to control tobacco.[6] This is so because the taxation effectively increases government revenue and decreases consumption, especially among that younger and lower-income groups of the population as these exhibit higher income elasticities. Because there are no estimates of tobacco price elasticities for Moldova in the literature, the study, as a first step, estimated tobacco price elasticity using four cohorts of household surveys. Next, the distributional impact of a rise in tobacco prices caused by a tax increase was estimated. The effect of higher prices on income because of the higher cost of tobacco consumption was evaluated, and, then, the effect of a reduction in medical expenditures because of the reduction in tobacco use was analyzed. The study finds that an increase in tobacco taxes has a progressive impact, benefiting lower-income groups in the population. The paper continues as follows: section 2 analyzes the literature; section 3 describes the estimation model; section 4 shows the results; section 5 presents a discussion; and section 6 concludes.

# **2. The Literature**

In the last century, about 100 million deaths were related to tobacco use.[7] If current trends were to remain constant, about 1 billion people could die from tobacco-related diseases during this century.[8] In Moldova, 2
over 10,000 children and more than 613,000 adults consume tobacco every day.<sup>2</sup> Globally, antitobacco policies include prohibiting smoking in particular locations to establish completely smoke-free environments, advertising to deter tobacco use, restrictions on tobacco sales by age, smoking cessation programs, prohibitions on tobacco sales close to schools, and taxation. These various policies have produced diverse effects in tobacco use and exposure among populations.

Although media campaigns, tobacco sale prohibitions, and smoking in public places are important policy approaches, tobacco taxation is considered one of the most efficient means of reducing tobacco consumption. As a secondary benefit, it also raises government revenue.[9] Because both effects are desirable from a policy standpoint, the use of taxes is considered economically justified. Additionally, the higher price elasticity of young people makes taxes a good way to fight tobacco use because young people will significantly reduce their consumption in the long run.

The magnitude of price elasticity is central in calibrating the effect of tobacco taxation systems because it determines the sensitivity of demand to a change in tobacco prices. There is extensive research on the price elasticity of tobacco. The _Handbook of Cancer Prevention: Tobacco Control_ , volume 14, reviews the international evidence on the United States and more than 50 other countries. The authors find that price elasticities of demand vary from zero to −0.47 in the United States. In the international literature, results vary: −0.80 in Bulgaria, −0.45 in Canada, −0.53 in China, −0.34 in Estonia, −0.66 in the Republic of Korea, and −0.47 in Ukraine.[10–15] For all 52 countries in the European region, Gallus et al. 2006 estimate a price elasticity of −0.46 using national yearly aggregated data.[16] For the United Kingdom, price elasticity is estimated at −0.5, and, for Hungary, a price elasticity between −0.44 and −0.37.[17,18] For Poland and Turkey, tobacco price elasticities have been estimated at −0.4 and−0.19, respectively, in the short run (−0.7 for long-run elasticity in Poland).[19,20] For India, cigarette price elasticities have been estimated for different income groups, including −0.83 and −0.26 for the lowest and highest income groups, respectively.[21] Among several factors, there are two important ones involved in determining tobacco price elasticities, namely income and age. People in lower-income groups tend to change consumption behavior more given a change in price (i.e. have more elastic demands) relative to higher-income groups.[8] At the same time, younger groups in populations are more responsive to tobacco price increases because on average they tend to be less nicotine dependent, more affected by peer effects, and possess less disposable income.[8] Studies in the United States have consistently shown that younger groups have higher elasticities relative to older groups.[22–24] Hence the importance of the increase in tobacco prices (through taxes) to reduce tobacco consumption among the younger groups of the population.

The major welfare costs associated with tobacco consumption are direct and indirect. The direct costs include the monetary health care costs (hospitalization, medication, medical supplies, equipment, and so on) and non– health care costs (job replacements for sick smokers, insurance, cleaning up the cigarette ash and stubs, packaging, the smoke residue of smokers, and so on). The indirect costs include the loss of productivity because of lost working days related to smoking illnesses as well as the value of the lives prematurely lost.

Some well-studied and well-documented costs not covered in this paper include days of life lost and working years lost because of early mortality.[25] Secondhand smoke has been proven to be an important societal cost of smoking, affecting the health of adults and children.[26] In the state of Indiana in the United States, the

> 2 Children refers to individuals under age 18.

3
health-related costs of secondhand smoking have been estimated at more than $1.3 billion yearly.[26] There are several potential benefits of tobacco taxation because of the increase in government revenue and the improvement and extension of policies on health expenditures, social welfare, education, and pensions. In this paper, policies are not earmarked as possible benefits because they depend on political considerations that exceed the mere increase in taxes.

# **3. The Health System in Moldova**

# **A system inherited from the Soviet Union**

Moldova was established as an independent state in 1991 following the dissolution of the Soviet Union. This new country continued to rely on the infrastructure, policies, and systems of the previous establishment. Today, Moldova is part of the Commonwealth of Independent States (CIS), which, besides Moldova, is composed of the former Soviet republics of Armenia, Azerbaijan, Belarus, Kazakhstan, the Kyrgyz Republic, the Russian Federation, Tajikistan, and Uzbekistan, as well as two associate states, Turkmenistan and Ukraine. Moldova inherited the Semashko health system, along with relevant staff and infrastructure, characterized by overcapacity, particularly in tertiary hospitalization and specialized institutions.[27] Several reforms have been introduced since independence, particularly the creation of a mandatory health insurance system (MHI) in 2004 and the National Health Insurance Company (NHIC). The contributions for the MHI come predominantly through a payroll tax of a fixed 7 percent. The nonworking population is covered through transfers from the central government to the NHIC. Voluntary health insurance is limited, accounting for less than 0.4 percent of total health expenditures in 2014.[4] Total health expenditure represented 10.3 percent of gross domestic product (GDP) in 2014. Government expenditure was 51.4 percent of total health expenditure, and the rest came mostly from contributions to the MHI. Of total health expenditure, 3 percent was from the out-of-pocket payments of patients.[28]

# **Similarities with neighboring countries**

The health indicators are similar in Moldova and neighboring countries, particularly Russia and Ukraine. In 2009, Moldova had 313 physicians per 100,000 population, similar to the 315 in Ukraine, but less than the 431 in Russia and the CIS average of 377.[4] The number of hospital beds was 583, below the CIS average of 745. While, in Moldova, more than 10 percent of GDP is spent on health services, the corresponding expenditure in the CIS is closer to 6 percent. In absolute numbers, measured in 2009 U.S. dollars, the per capita expenditure on health care was $341 in Moldova, $445 in Ukraine, and $1,037 in Russia; the CIS average was $714. [28]

# **Results in health**

Health indicators in Moldova are comparable with those in other CIS countries, but far below the EU average. Life expectancy at birth in Moldova is 68.2 years among men and 75.7 years among women, slightly below the CIS average, but well below the average among men in the EU, which is more than 80 years. The infant mortality rate in Moldova is 9.5 deaths per 1,000 live births, higher than the 7.0 deaths per 1,000 in the CIS.

# **Results in tobacco**

Tobacco prevalence in Moldova is 44.0 percent among men and 5.6 percent among women (table 1). The high rate of tobacco consumption is comparable with other CIS countries, such as Russia and Ukraine, where tobacco consumption rates among men are 51 percent and 46 percent, respectively.[5] 4
**Table 1 – Tobacco Prevalence, by Age and Sex, %**

|_Age_|_Men_|_Women_|_Total_|
|---|---|---|---|
|18–29|45|7.4|27|
|30–44|48|6.6|29|
|45–59|42|4.0|22|
|60–69|31|1.8|16|
|18–69|44|5.6|25|

_Source:_ World Health Organization, 2014, “Prevalence of Noncommunicable Disease Risk Factors in the Republic of Moldova, STEPS 2013,” Regional Office for Europe, World Health Organization, Copenhagen.

Other surveys have been designed to assess tobacco use in Moldova, though their results are not necessarily comparable as they use different questionnnaires and sample frames. Nonetheless, results are aligned with the WHO findings. According to Krasovsky (2016),[29] the 2005 Moldova Demographic and Health Survey (DHS) indicates that 51.1 percent of men (between 15 and 59 years old) and 7.1 percent of women (between 15 and 49 years old) were current smokers, whereas the 2012 Multiple Indicator Cluster Survey (MICS) showed that 48.5 percent of men (between 15 and 49 years old) and 8.2 percent of women (between 15 and 49 years old) smoked. Finally, a national cross-sectional survey on risk factors of noncommunicable diseases conducted between September 2013 and May 2014 showed that among men 15 years and older, 43.6 percent smoked (and 40.6 percent were dailty smokers) and 5.6 percent of women smoked (with 4.6 percent being daily smokers).

# **Deaths attributable to tobacco**

Several health conditions and causes of death are attributable to tobacco consumption. In the European region of the World Health Organization (WHO), tobacco accounts for 297 age-adjusted deaths per 100,000 population, less than half relative to Moldova. In Moldova, the tobacco-attributed mortality rate narrowed from 763 age-standardized deaths per 100,000 population in 2010 to 613 in 2015, similar to the rate in Ukraine in 2004[28]. Tobacco-attributed deaths represent more than 50 percent of the total age-adjusted deaths in Moldova.

# **4. The Model**

The study estimates the impact of the tobacco tax in Moldova using an extended cost-benefit analysis, similar to the approach of other studies described in the literature.[25, 30] It estimates how tobacco taxes would change household incomes through an analysis of two factors: (1) the rise in tobacco expenditures because of the tax increase and (2) the reduction in medical expenses because of less tobacco consumption. The aggregated effect of the tax policy is estimated as follows: Income effect = change in tobacco expenditure (A) + lower medical expenses (B) (1) The study baseline scenario is derived from the 2015 household budget survey. The survey is used to measure general consumption and tobacco consumption. Data limitations do not allow a simulation of the exact price increases by brand, but this may be accomplished through the aggregate prices paid by households.

A partial equilibrium model allows the distributional effects of the tobacco tax to be assessed, resulting in an estimation of the first-order effects of these policies. The study then uses a partial equilibrium approach and evaluates the change in prices by relying mainly on household expenditure patterns. This implies that only the first-order response is being assessed and that additional behavioral changes among economic agents, such as the increase in the consumption of other goods, are not included. These assumptions imply that the model uses 5
LP (w; + Aw;) ~~«=A~~ <u>.</u> Pio Wj Api Aw; AP (Expenditure.,) A Tobacco Expenditure; = ((1 + AP)(1 + € * AP) — 1) * Expenditure;

> A Prop.Tobacco Expenditure. = ~~(GFAP)1+AP)(1(4 erAP)~AP )—1)+*E. 1) +Expenditureiodi~~ <u>i</u> Total Expenditure;

A Prop. Medical Exp. _ ~~((1+e*AP)—1)*Cost Treat Tobacco Related Diseases;~~ Total Expenditure; A Expenditure = ACAP + ACP, + APC)
sold in Moldova how many were actually consumed and how many were smuggled and sold in other countries. Price differentials between neighboring countries and other EU countries provide incentives for Moldovan cigarettes to be smuggled to countries like Romania, Ukraine, Ireland, Luxembourg and the United Kingdom[29]. Therefore, household surveys could potentially better reflect the total amount consumed and prices effectively paid.

Yet, these surveys present other problems. Surveys are affected by national macroeconomic deterrents of consumption, such as reductions in national production or imports, advertisement, or sales restrictions.[10] To control for these problems, the study examined national data on tobacco production, tobacco regulation, inflation, and macroeconomic shocks during the period of analysis. Another advantage of surveys is that one may detect the price paid by consumers and account for promotions and sales. Nonetheless, this estimation of the price paid is tied to certain endogeneity concerns because heavy smokers may consume cheaper brands, buy greater quantities, shop at lower-priced retailers, engage in tax-avoiding behaviors, and take advantage of promotions more regularly than less habitual smokers.[10] Moreover, in household surveys, one household member typically responds to the survey for the household. The accuracy of the survey thus depends on how well informed the individual is about consumption expenditures and quantities purchased by other household members.[10] Despite all the limitations, the use of household surveys to calculate price elasticities is a common practice that has been used in Australia, Canada, India, the United States, and elsewhere.[10,11,34–36] The study, vigilant to these considerations, calculated the price elasticity of tobacco. It used the inflation rate provided by the National Bureau of Statistics to obtain the real prices paid by consumers (table 2).

**Table 2 – Inflation Index**

|_Indicator_|_2012_|_2013_|_2014_|_2015_|
|---|---|---|---|---|
|Consumer price index|100|104.6|109.9|120.6|

_Source:_ Data of the National Bureau of Statistics.

Using the inflation and the national budget survey, the study calculated the real prices of cigarettes paid by consumers in Moldova (table 3). Table 3 shows prices paid for cigarettes by income decile, after eliminating outliers. In line with the literature, we can see an important difference of prices paid for cigarettes in each income decile. This important variance is related to the prices of cigarettes inside the country. For example, in 2015 a package of non-filtered Astru cigarettes could cost 4 MDL, while a package of Marlboro could cost 22 MDL, a pack of Winston 20 MDL and a pack of Montecarlo 15 MDL[29].

**Table 3 – Estimated Real Prices Paid per 20 Cigarette Package by Decile**

Real Average Prices Paid for

||2012||2013||2014||2015||
|---|---|---|---|---|---|---|---|---|
|Decile|Average|SE|Average|SE|Average|SE|Average|SE|
|1|4.25|0.17|4.05|0.16|5.95|0.39|5.61|0.25|
|2|5.00|0.20|4.96|0.25|5.92|0.40|6.43|0.32|
|3|5.13|0.29|5.62|0.37|6.34|0.31|6.60|0.30|
|4|5.16|0.25|5.72|0.32|6.29|0.33|7.06|0.34|
|5|5.10|0.23|6.53|0.38|5.82|0.41|7.68|0.43|
|6|6.69|0.44|6.15|0.40|7.12|0.42|7.51|0.40|
|7|6.55|0.42|6.84|0.46|7.22|0.37|8.80|0.45|
|8|6.79|0.35|7.18|0.35|8.37|0.51|9.09|0.42|
|9|7.66|0.38|7.49|0.32|9.17|0.38|9.56|0.39|
|10|9.49|0.32|9.49|0.40|9.93|0.38|11.63|0.35|

7
Sources: Household Budget Survey 2012-2015. Eliminating 3SE outliers.

The declared prices paid by households and the declared quantities of cigarettes purchased are applied, thereby rendering possible a measure of the effective price paid for cigarettes that reflects changes in brand and quality. In Moldova, tobacco prices are affected by government action as it affects the specific and ad valorem tax. Tobacco tax policy has had many changes during the last 10 years. In 2007 filtered cigarettes had a specific tax of 6.5 Moldovan Lei (MDL), per 1,000 cigarettes and a 3% _ad valorem_ excise tax. Between 2008 and 2015 the Government of Moldova tested different changes for the specific tax and the _ad valorem_ tax. One problem it faced is that inexpensive cigarettes would pay a very small _ad valorem_ tax. Since 2016, there is a new minimum excise tax per 1,000 cigarettes, of 400 MDL, the specific tax was of 300, and the _ad valorem_ tax was 12%. In 2016, the excise share for cigarettes would vary from 56% to 25%, depending on the price of the cigarettes[29]. A detailed analysis of the tobacco taxation policy in Moldova can be found in Krasovsky (2016). Figure 1 shows the estimated average price paid for cigarettes per income decile based on household survey data adjusted for inflation as well as national statistical data.

**Figure 1 – Tobacco Price index, by Year and Decile**

After obtaining a measure of the prices paid for cigarettes in Moldova, the study calculates real prices per year and then the elasticity for each income decile of the population (figure 2; table 4).<sup>6</sup> It estimates an average tobacco price elasticity of −0.33, which, in absolute terms, is slightly lower than the elasticities found in the literature on other countries in the region, but within the confidence interval of the estimates of Gallus et al. (2006) on European countries.[37] The Standard error of this estimate is approximately 0.10, generating a 95% confidence interval of -0.20,+0.20. To show the effect of different scenarios, we simulate a lower bound elasticity and an upper bound elasticity. These estimates have differences of -0.2 and +0.2 with the elasticity

> 6  The use of three different elasticities helps to test the robustness of our results. We tried different specifications with subgroups of tobacco products to calculate elasticities, showing a variety of results, that are represented in the three possible scenarios. As an example: for packages of 20 cigarettes, filtered and not-filtered, sold in authorized establishments, for personal consumption and after eliminating outliers, the estimated elasticity is similar to the lower-bound elasticity presented in this paper.

8
previously estimated. The lower-bound elasticity tends to reflect income groups that would not change consumption patterns, such as rural residents or older people.

**Figure 2 – Cigarette Price Elasticities**

**Table 4 – Cigarette Price Elasticities and Income Deciles**

|_Price elasticity_|_Decile 1_|_Decile 2_|_Decile 3_|_Decile 4_|_Decile 5_|_Decile 6_|_Decile 7_|_Decile 8_|_Decile 9_|_Decile 10_|_Average_|
|---|---|---|---|---|---|---|---|---|---|---|---|
|Lower bound|-0.31|-0.19|-0.20|-0.14|-0.12|-0.12|-0.12|-0.05|-0.04|-0.06|-0.13|
|Medium bound|-0.51|-0.39|-0.40|-0.34|-0.32|-0.32|-0.32|-0.25|-0.24|-0.26|-0.33|
|Upper bound|-0.71|-0.59|-0.60|-0.54|-0.52|-0.52|-0.52|-0.45|-0.44|-0.46|-0.53|

_Source:_ Estimates based on data of the household budget surveys 2012–15.

Meanwhile, the upper-bound elasticity tends to reflect a longer-term scenario, echoing the effect the tobacco tax would have on younger people. After a few decades, these groups will be the majority of smokers. Thus, the total average effect of the price increase is more accurately approximated by the upper-bound price elasticity. To test the robustness of our calculation, we re-estimate elasticities eliminating different years from the sample. Results of such calculations are presented in Annex I. Annex II presents an assessment of the stability of the survey’s calculated deciles. We find that the income deciles are relatively stable in terms of demographic characteristics. In addition, we tested and confirmed that the elasticity estimations do not depend on a specific survey year, as the exclusion of different survey rounds from the estimation yields similar results.

The literature presents different views on the most accurate way to translate the reduction in tobacco consumption into the reduction of medical expenses. One argument is that tobacco price increases reduce consumption on average, but price increase does not necessarily lead to adult tobacco cessation in a similar way,[10] as some people may quit, while others may just reduce the number of cigarettes smoked per day. In addition, there are two two important points to underline. First, it has been shown that only quitting – and not smoking less -brings substantial positive effects on medical well-being[2,38-40]. Second, tobacco cessation has a stronger health effect for younger groups of the population[41]. This paper takes the approach that in the medium to long-term, all the reduction in consumption could be directly translated into tobacco cessation 9
among the population. This view considers that tobacco price increase prevents tobacco initiation and induces cessation among younger groups of the population.

Several studies have analyzed the cost of smoking in each country or globally such as WHO has done. To estimate the cost of smoking in Moldova, the present study uses official calculations of the government. In 2001, the Ministry of Health estimated that the amount of health care expenditure associated with tobacco was MDL 360.4 million or $27.6 million.<sup>7</sup> Moreover, the estimated economic costs because of lost productivity associated with premature death, outpatient treatment, and hospitalization was MDL 430 million or $32.9 million. The total yearly cost of tobacco use would thus be $60.5 million.

Public-sector expenditure on health in 2014 was 51.4 percent of total health expenditures. The study assumed that 48.6 percent of this cost—$29.4 million—is covered directly by households[28].

A more conservative option would involve estimating the economic cost of the treatment of tobacco disease by multiplying the value of treatment by the number of deaths attributed to tobacco (assuming that most of the individuals were treated at some point). The major causes of death in Moldova are cardiovascular disease (59 percent), cancers (14 percent), injuries (7 percent), chronic respiratory disease (3 percent), diabetes (1 percent), and other noncommunicable diseases (12 percent) [42]. WHO estimates the the number of deaths per 100,000 population in Moldova attributable to tobacco at 613. Because the population of Moldova is 3.52 million (2016 data of the World Bank), it can be inferred that more than 21,600 deaths per year may be attributed to tobacco consumption.

No direct estimates exist of the cost or out-of-pocket expenditures for the treatment of cardiovascular disease, cancer, or respiratory diseases in Moldova. Denisova and Kuznetsova (2012) estimate the treatment costs in Ukraine based on estimates for Russia, arguing that the medical systems of the two countries are similar in personnel, infrastructure, and other inputs[43]. The similarity in size, personnel, and inputs between Ukraine and Moldova in medical systems shows that Ukraine may be a good candidate for extrapolating specific costs in Moldova. Following the methodology of Denisova and Kuznetsova, this study calculated the costs in Moldova in this way (table 5). The treatment costs in Ukraine are indexed to the ratio of per capita public health expenditure in Moldova. The total cost and the total cost per household associated with tobacco and selected diseases are estimated at $10.2 million, which is more conservative than previous government estimates.<sup>8</sup>

**Table 5 – Tobaco Related Medical Costs in Ukraine and Moldova**

|_Disease_|_Treatment cost, Ukraine_|_Treatment cost, Moldova_|_Private sector cost_|_Number_|_Total cost, $_|
|---|---|---|---|---|---|
|Cardiovascular disease|684|524|492|16,760|8,241,911|
|Cancer|633|485|455|3,977|1,809,887|
|Chronic respiratory infection|244|187|175|852|149,496|
|Total||||21,589|10,201,295|

_Sources:_ Denisova and Kutznetzova 2012; WHO 2012. _Note:_ Per capita national health care expenditure, Moldova: $341; Ukraine: $445. Government expenditure, 51.4 percent. Cardiovascular disease: 59 percent; cancer: 14 percent; chronic respiratory infection: 3 percent at the national level.

> 7 The exchange rate on December 1, 2001 was MDL 13.07 = $1.

> 8 The medical cost estimation in this paper can be considered as a lower-bound cost. Given the available data, these are the closest estimates that could be calculated. Other papers for countries like Ukraine, Colombia, Chile or the United States consider many more diseases and medical problems associated to tobacco consumption [25,44–46].

10
In addition, costs of medical treatment of tobacco-related diseases in seven hospitals in Moldova during 2016 were obtained. These costs were identified from the Diagnosis Related Group (DRG) database based on the following ICD-10<sup>9</sup> codes:

1. Malignant neoplasms, including lip, oral cavity, pharynx, esophagus, stomach, larynx, trachea, lungs and bronchial tubes, kidneys, bladder and pancreases (C00-C14, C15-C26, C30-C39, C64-C68);

2. Cardiovascular diseases, including ischemic heart disease, other heart diseases, hypertension, cerebrovascular diseases and other CVD (I10-115, I20-125, I30-152, I60-169); 3. Respiratory diseases, including influenza and pneumonia, other acute lower respiratory diseases and chronic obstructive pulmonary disease (J10-J18, J20-J22, J40-J47).

This data are based on a costing exercise currently underway, which was completed for seven pilot hospitals and represent aproximtely 20 percent of total patients treated in Moldova for 2016. Hospitals covered in our case represent tertiary and secondary level of care: Oncology Institute, Emergency Hospital, Neurology Institute, Republican Clinical Hospital, Holly Trinity Hospital, Cahul Raion Hospital).

**Table 6 – Tobacco Related Medical Costs in Seven Hospitals in Moldova**

|_Disease_|_Treatment cost, Moldova_<br>_(USD$)_|_Number Sample_|_Tobacco Related_<br>_Cases_|_Total Estimated_<br>_Cost_|
|---|---|---|---|---|
|Cardiovascular disease|762|1525|16,760|12,771,120|
|Cancer|352|327|3,977|1,399,904|
|Pneumonia and respiratory diseases|657|169|852|559,764|
|<br>Total||||14,730,788|

* ICD-10: Cardiovascular diseases (CVD): including ischemic heart disease, other heart diseases, hypertension, cerebrovascular diseases and other CVD (I10-115, I20-125, I30-152, I60-169); Number of cases survey= 1525

** ICD-10: Malignant neoplasms, including lip, oral cavity, pharynx, esophagus, stomach, larynx, trachea, lungs and bronchial tubes, kidneys, bladder and pancreases  (C00-C14, C15-C26, C30-C39, C64-C68); Number of cases survey= 327 *** ICD-10: Respiratory diseases, including influenza and pneumonia, other acute lower respiratory diseases and chronic obstructive pulmonary disebase (J10-J18, J20-J22, J40-J47); Number of cases survey= 169

By comparing the estimated treatment costs presented in tables 5 and 6, it is possible to assess that the survey shows higher costs for cardiovascular diseases and pneumonia and respiratory diseases, but lower cost estimates for cancers and malignant neoplasms. The higher cost of pneumonia and respiratory diseases from the survey can be explained due to the fact that these hospitals are tertiary and secondary level care, therefore they attend patients with complex and advanced cases. Therefore, this would be a more appropriate cost measure for diseases associated with tobacco related to mortality. The total cost associated with these estimations is US$14.7 million, higher than the US$10.2 million previously estimated. In the following, the analysis will take the upper bound cost estimates; however, the results using the lower bound do not change much and are presented on Annex IV.

# **Descriptive Statistics**

The study used the household budget survey to estimate the cost of an increase in tobacco taxes. Table 7 summarizes the most important indicators, including the total monthly expenditure of households in Moldova.

> 9 International Statistical Classification of Diseases and Related Health Problems (ICD), ICD-10, refers to the tenth revision.

11
**Table 7 – Baseline Descriptive Results, Household Survey 2015**

|_Indicator_|_Decile 1_|_Decile 2_|_Decile 3_|_Decile 4_|_Decile 5_|_Decile 6_|_Decile 7_|_Decile 8_|_Decile 9_|_Decile 10_|
|---|---|---|---|---|---|---|---|---|---|---|
|Household (HH) Expenditure, (US$)|185|226|247|247|259|278|319|329|<br>382|<br>568|
|PerCapita HH Expenditure. (US$)|45|59|68|77|86|96|109|123|<br>147|<br>230|
|<br>Tobacco Expenditure, %*|0.68|<br>0.54|0.62|0.65|0.69|0.78|0.58|0.69|<br>0.68|<br>0.51|
|<br>Households that smoke, %|19|16|15|16|13|12|13|11|<br>15|<br>19|
|Woman head, %|29|31|31|34|41|46|42|45|<br>46|<br>48|
|Average age, head|52|54|57|58|58|58|56|57|<br>54|<br>48|
|Household size|3.53|<br>3.14|2.84|2.58|2.35|2.22|2.25|2.10|<br>2.04|<br>1.85|

* Proportional to total consumption in each decile.

# **5. Results**

After obtaining the baseline results described in table 7, the study estimated the effect of the tax increase on prices and medical expenditures, aggregating these two effects into a single measure. It used the three scenarios in the tobacco price elasticity, the lower-bound, medium-bound, and upper-bound scenarios presented in table 3. These three scenarios allow an understanding of how results might change under various assumptions.

# **Tobacco price increase**

As a first step, the income changes that arise from the increase in tobacco prices are estimated for each income decile based on low-, medium-, and upper-bound elasticity. Using equation (4) and the data illustrated in tables 4 and 7, the study calculated the effects of the tobacco price increase. For example, given the lower-bound − elasticity ( 0.13) in table 4, the proportion of tobacco expenditure among the first decile (2 percent) in table 7, and a price increase of 25 percent, the increase in expenditure can be gauged at 0.11 percent. This represents a loss in welfare because consumers would devote a higher proportion of their incomes to purchasing the same amount of tobacco, thereby reducing the consumption of other goods. The results among all income deciles and elasticity scenarios are shown in table 8.

**Table 8– The Direct Effect of a Price Increase on Taxes, %**

|_Price shock_|_Decile 1_|_Decile 2_|_Decile 3_|_Decile 4_|_Decile 5_|_Decile 6_|_Decile 7_|_Decile 8_|_Decile 9_|_Decile 10_|
|---|---|---|---|---|---|---|---|---|---|---|
|Complete pass-through|-0.17|-0.14|-0.16|-0.16|-0.17|-0.20|-0.15|-0.17|-0.17|-0.13|
|Low-bound elasticity|-0.11|-0.10|-0.12|-0.13|-0.15|-0.17|-0.13|-0.16|-0.16|-0.12|
|Medium elasticity|-0.06|-0.07|-0.08|-0.09|-0.10|-0.12|-0.09|-0.12|-0.12|-0.09|
|Upper-bound elasticity|-0.02|-0.04|-0.04|-0.05|-0.06|-0.07|-0.05|-0.08|-0.08|-0.05|

_Source:_ Based on data of the 2015 household budget survey. _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.

Across the lower- and medium-bound scenarios, the direct effect of the tobacco tax is a welfare loss, but, in none of the cases does the shock seem to be regressive. Meanwhile, in the case of the upper-bound scenario, the tax increase seems to have positive effects on income, as individuals react strongly to price increases by reducing consumption (figure 3). In the lower-, medium-, and upper-bound elasticity scenarios, the effect of the price increases is progressive, affecting the upper-income groups in a larger proportion. To show the effect of the elasticities on prices, table 8 includes estimates of a complete pass-through scenario, whereby the increase in prices is completely passed on to consumers without a reduction in consumption. Only in this case is the price shock regressive, affecting the lower-income deciles to a greater degree.

12
**Figure 3 – Change in expenditures due to Tobacco Taxes (direct effect)**

# **Medical expenses**

The study estimated annual medical costs associated with tobacco consumption on the assumption that there is a direct medical impact on health. Although the assumption is unrealistic in the short run, the long-run reduction of tobacco consumption would trend according to this pattern, whereby a decline in tobacco consumption would be strongly associated to a reduction in tobacco-related diseases. Health expenditures are estimated using equation (5) and tables 4 and 7 (table 9; figure 4).

|_Price shock under_|_Decile 1_|<br>_Decile 2_|**Table 9**<br>_Decile 3_|**– Reducti**<br> <br>_Decile 4_|**on in Me**<br>_Decile 5_|**dical Cos**<br>_Decile 6_|**ts (%)**<br>_Decile 7_|_Decile 8_|_Decile 9_|_Decile 10_|
|---|---|---|---|---|---|---|---|---|---|---|
|Lower-bound elasticity|0.09|0.03|0.03|0.02|0.01|0.01|0.01|0.00|0.00|0.00|
|Medium elasticity|0.14|0.06|0.06|0.04|0.03|0.02|0.02|0.01|0.01|0.01|
|Upper-bound elasticity|0.20|0.10|0.09|0.07|0.04|0.04|0.04|0.03|0.03|0.02|

_Source:_ Based on data from the 2015 Household Budget Survey. _Note:_ The table shows the share of total consumption for each decile.

13
**Figure 4 – Reduction in Medical Costs due to Tobacco Taxes**

The medical effects show a highly progressive effect, disproportionally benefiting lower-income groups in the population. This derives from two factors; (1) the higher price elasticity and (2) a lower income base that massively benefits from the reduction in medical costs.

# **Net effects: Total distributional impacts**

After calculating the effects of the price increase on consumption and medical expenditures, the study estimated both effects jointly. The aggregate effect of the increase in tobacco taxes is progressive, benefiting lower-income groups in the population more in all three scenarios (table 10; figure 5). In the lower-bound the net effect is negative among the all the income groups, affecting less the lower income groups. In the medium and upperbound scenario, the lower income groups benefited from the policy of raising the tobacco tax, but the higherincome groups see negative effects due to the increase in tobacco prices.

|||**Table**|**10 – Net**|**effect on**|**househo**|**ld expen**|**ditures (**|**%)**|||
|---|---|---|---|---|---|---|---|---|---|---|
|_Price shock under_|_Decile 1_|_Decile 2_|_Decile 3_|_Decile 4_|_Decile 5_|_Decile 6_|_Decile 7_|_Decile 8_|_Decile 9_|_Decile 10_|
|Lower-bound elasticity|-0.02|-0.07|-0.09|-0.12|-0.14|-0.16|-0.12|-0.16|-0.16|-0.12|
|Medium elasticity|0.08|-0.01|-0.02|-0.05|-0.08|-0.09|-0.07|-0.11|-0.11|-0.07|
|Upper-bound elasticity|0.18|0.06|0.05|0.02|-0.02|-0.03|-0.01|-0.05|-0.05|-0.03|

_Source:_ Based on data from the 2015 Household Budget Survey. _Note:_ The table shows the share of total consumption for each decile.

14
**Figure 5 - Net Effects of Tobacco Taxes**

# **6. Discussion**

Tobacco-related illness accounts for 6 percent of total health care expenditure in the EU and an important share of health care expenditure in Moldova. The relevance of tobacco consumption in Moldova is not only economic, but social because it is the leading factor in mortality in the country. The negative health and economic impacts of tobacco highlight the relevance of tobacco tax policies that could diminish tobacco consumption.

Tax policies are one of the best instruments to reduce tobacco consumption and increase government revenue, but critics view this approach as regressive. This paper shows that tobacco tax increases are not regressive, but progressive and pro-poor because they could eventually boost incomes among lower-income population groups.

Using four years of household budget surveys, the study calculated the price elasticity of tobacco for the population in Moldova, obtaining an average price elasticity of −0.33 and estimates for the 10 income deciles. The elasticity for the lowest income group is −0.53 and −0.13 for the highest income group. This appears to be the first tobacco price elasticity estimate across income groups ever produced on Moldova.

To extend the analysis, other elasticities were created to simulate the short-term and long-term elasticity scenarios. Using an extended cost-benefit analysis, the study simulated a price increase of 25 percent and obtained the expenditure increases associated with the higher price as well as the reduction in medical expenses caused by the reduction in tobacco consumption. The results show that, in all cases, the tobacco tax increases are progressive, while the reduction in medical expenses outweighs the price increases. Moreover, in the upperbound elasticity, the net gains of the tobacco tax policy are positive for the lower income groups.

15
# **Evidence before this study**

A search has been undertaken and completed among the PubMed, Embase, and POPLINE databases for related studies published from January 2, 2000, to June 30, 2017, with no language restriction.<sup>10</sup> No previous papers estimating the tobacco price elasticity in Moldova or research related to the inequality effects of tobacco tax increases in this country have been discovered. The present study builds on the previous literature on price elasticity estimation and on the health and economic literature on extended cost-benefit analysis.

# **Added value of this study**

The value of this study is twofold. First, this study contributes to the estimation of the tobacco price elasticity per income decile in Moldova using household survey data and the prices paid by consumers. Second, this study directly quantifies the potential impact of a tobacco price rise on consumption increases across income groups and estimates the distributional effects of the price rise, including an associated reduction in medical expenses. The analysis provides evidence of the potential distributional impact of tobacco tax policy on consumption in Moldova, but also on broader health care system goals of improving health outcomes and inequality reduction among income groups within the population.

# **Interpretation of all the available evidence**

Tobacco taxes are deemed to be regressive by many economists and health researchers who argue that lowincome smokers spend a disproportionately greater share of their income on tobacco. We find that, in Moldova, there is a price elasticity of −0.33 and that tobacco taxes benefit the poor because the reduction in medical expenses outweighs the effects of the price increase.

> 10 See Embase (database), Elsevier, Amsterdam, https://www.elsevier.com/solutions/embase-biomedical-research; POPLINE (database), K4Health (Knowledge for Health Project), Johns Hopkins Center for Communication Programs, Johns Hopkins– Bloomberg School of Public Health, Johns Hopkins University, Baltimore, MD, https://www.popline.org/; PubMed (database), National Center for Biotechnology Information, U.S. National Library of Medicine, Bethesda, MD, https://www.ncbi.nlm.nih.gov/pubmed.

16
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# **8. Annex I**

In order to check for the robustness of the elasticity simulation, we eliminate one year of the surveys and estimate the elasticities again. The results are displayed in the graph bellow, where one year is excluded and then the elasticities are re-calculated. The biggest variation is seen with the exclusion of the year 2015, that would generate a higher – in absolute terms – price elasticity. All possible scenarios fall inside the 95% confidence interval of the original estimations. This implies that the elasticities are not prominently affected by the specific years chosen to perform the estimation.

20
# **9. Annex II**

In order to check for the robustness of the different decile groups used from the household survey we compared specific characteristics such as household size, age and gender of head of household among income deciles. As shown in the following table, only small variations among the decile groups were found.

**Table AII– Descriptive Statistics of Income Deciles per year**

## Household Size

|Decile|2012<br>Average|SE|2013<br>Average|SE|2014<br>Average|SE|2015<br>Average|SE|
|---|---|---|---|---|---|---|---|---|
|1|3.82|0.09|3.64|0.10|3.56|0.09|3.53|0.08|
|2|3.17|0.07|2.98|0.07|3.15|0.08|3.15|0.08|
|3|2.93|0.07|2.77|0.07|2.73|0.07|2.84|0.08|
|4|2.62|0.06|2.53|0.06|2.62|0.07|2.58|0.06|
|5|2.50|0.06|2.38|0.07|2.43|0.07|2.35|0.06|
|6|2.47|0.06|2.22|0.05|2.16|0.05|2.22|0.06|
|7|2.26|0.06|2.27|0.06|2.17|0.06|2.25|0.06|
|8|2.28|0.06|2.20|0.06|2.20|0.06|2.10|0.06|
|9|2.15|0.05|2.16|0.06|2.13|0.06|2.04|0.05|
|10|1.87|0.05|1.84|0.05|1.79|0.04|1.85|0.05|
|Household|Head Gender||||||||
||2012||2013||2014||2015||
|Decile|Average|SE|Average|SE|Average|SE|Average|SE|
|1|1.35|0.03|1.29|0.03|1.30|0.03|1.29|0.02|
|2|1.35|0.02|1.33|0.02|1.34|0.03|1.31|0.02|
|3|1.33|0.02|1.36|0.02|1.40|0.03|1.31|0.02|
|4|1.37|0.02|1.38|0.02|1.38|0.03|1.34|0.02|
|5|1.42|0.02|1.44|0.03|1.43|0.03|1.41|0.02|
|6|1.44|0.02|1.44|0.02|1.45|0.02|1.46|0.02|
|7|1.47|0.02|1.45|0.02|1.45|0.03|1.42|0.02|
|8|1.42|0.02|1.45|0.03|1.39|0.02|1.45|0.02|
|9|1.46|0.02|1.45|0.03|1.43|0.03|1.46|0.02|
|10|1.50|0.02|1.49|0.03|1.47|0.03|1.48|0.03|
|Household|Head Age||||||||
||2012||2013||2014||2015||
|Decile|Average|SE|Average|SE|Average|SE|Average|SE|
|1|52.47|0.85|52.39|0.86|52.34|0.85|51.82|0.78|
|2|55.38|0.81|54.83|0.78|55.19|0.82|54.08|0.82|
|3|55.41|0.83|56.85|0.72|57.42|0.80|56.92|0.74|
|4|58.08|0.73|57.27|0.69|57.12|0.72|58.04|0.76|
|5|57.25|0.70|57.52|0.78|57.19|0.80|58.38|0.71|
|6|56.00|0.74|57.78|0.66|58.08|0.72|58.30|0.77|
|7|57.04|0.70|55.95|0.79|56.61|0.78|56.41|0.69|
|8|53.33|0.69|54.65|0.85|55.34|0.80|56.55|0.75|
|9|50.63|0.80|51.17|0.81|52.72|0.79|53.64|0.75|
|10|45.14|0.86|47.67|0.87|47.99|0.80|47.95|0.80|

_Source:_ Based on data from the 2015 Household Budget Survey.

_Note:_ The table shows the share of total consumption for each decile.

21
# **10. Annex III**

We estimate the price elasticity of cigarettes in Moldova for a pack of 20 cigarettes, filtered and notfiltered, sold in authorized establishments, for personal consumption. This extra specification of tobacco products allows us to eliminate variations on demand due to individuals purchasing from non-authorized sellers or buying to sell cigarettes. These purchases could vary because of governmental controls of illegal markets, and other factors not related to price changes. We also eliminated outliers beyond three standard deviations. After eliminating outliers, we look at the obtained prices. In the graph below we can see that the distribution seems to be bimodal, having two distinctive peaks. The prices for the 20 cigarettes are between 2 MDL and 15 MDL, similar to the prices reported by Krasovsky (2016).

**Figure AIII-1 - Selected real cigarettes prices in 2015**

We proceed to calculate the price elasticity of the pack of 20 cigarettes during the years 2012-2105. The result is shown in figure 2.

22
# **11. Annex IV**

In this annex we present the results obtained by following the same methodology but using the lower bound health costs as indicated in table 5 and referenced in page 11

|||**Table A**|**IV-1 – N**|**et effect**|**on house**|**hold expe**|**nditures**|**(%)**|||
|---|---|---|---|---|---|---|---|---|---|---|
|_Price shock under_|_Decile 1_|_Decile 2_|_Decile 3_|_Decile 4_|_Decile 5_|_Decile 6_|_Decile 7_|_Decile 8_|_Decile 9_|_Decile 10_|
|Lower-bound elasticity|-0.05|-0.08|-0.10|-0.12|-0.14|-0.16|-0.12|-0.16|-0.16|-0.12|
|Medium elasticity|0.04|-0.03|-0.04|-0.06|-0.09|-0.10|-0.07|-0.11|-0.11|-0.08|
|Upper-bound elasticity|0.12|0.03|0.02|-0.01|-0.03|-0.04|-0.03|-0.06|-0.06|-0.04|

_Source:_ Based on data from the 2015 Household Budget Survey. _Note:_ The table shows the share of total consumption for each decile.

## **Figure IV-1 - Net Effects of Tobacco Taxes**

23