Tobacco excise tax increase and illicit cigarette consumption: evidence from Vietnam

One of the most significant barriers to tax reform and tax rate increases in Vietnam is the threat of illicit trade promulgated by the tobacco industry. The industry argues that higher taxes will stimulate smuggling, thereby undermining tax policy objectives and impairing the domestic tobacco manufacturing. Unfortunately, there is a dearth of updated and independent studies to verify this claim and inform the tax reform in the country.

The present paper attempts to generate new estimates of the illicit consumption and compare them to a prior study to ascertain the changes in the levels of the illicit trade after a tobacco excise tax increase.

The study uses primary data collected from the Tobacco Consumption Survey in late 2017. It is a multistage cluster random household survey, covering a sample size of over 2700 smokers, and purposively designed to make its results comparable to prior estimates, which have been done before the tax increase. Particularly, we collect packs from selected smokers and perform careful inspection to identify the prevalence of illicit products. In addition to the consumption, we collect data on brand choices, cigarette prices, the types of stores that the smokers bought their cigarettes, as well as their socioeconomic characteristics. They allow us to determine the regional variation of the illicit trade, identify the main illicit cigarette brands, compare the prices of the licit and illicit cigarettes, and examine the main sources of the illicit cigarettes. Incomes of the licit and illicit cigarette smokers are also compared.

Contrary to the tobacco industry's predictions, our estimates demonstrate that the level of the illicit trade declined even after the increase of taxes imposed on tobacco products in Vietnam. The illicit cigarettes account for only about 13.72% of the total cigarette consumption in Vietnam in 2017, lower than the 20.7% estimate in 2012 done by the previous study. The illicit cigarettes are heavily concentrated in the southern provinces of Vietnam bordering Cambodia, and locally accessible to the smokers from grocery stores. Jet and Hero are the two most popular brands, representing over 80% of total illicit consumption in the country. Interestingly, the illicit cigarettes are on average more expensive than the illicit products in Vietnam, unlike many other countries where the former are typically cheaper than the latter. Consequently, as is to be expected, the illicit cigarette smokers tend to earn higher incomes than those smoking the licit products.

Raising the taxes levied on tobacco does not necessarily cause higher illicit consumption in Vietnam as widely stated by the tobacco industry. The Government of Vietnam should recognise the tobacco tax policy as the most effective and cost-effective tobacco control measure and establish a clear road map of progressive tobacco excise tax increases so that total tax levied on tobacco accounts for at least 75% of retail price as suggested by the WHO to reduce smoking prevalence in the country.