Income and cigarette price responsiveness: evidence from Vietnam

Vietnam has an ad valorem tobacco excise structure, with the tax base being factory gate price, making the excise susceptible to tax avoidance and less effective in reducing tobacco use. To address these issues, therefore, the government has considered switching to a mixed system in which a specific rate would be imposed on every cigarette pack in addition to the existing ad valorem rate. However, little is known about how smokers with different incomes respond to price increases in Vietnam, raising the concern of regressivity of the tax reform.

This paper aims to provide timely and more updated evidence to support policy discussion on tobacco excise tax reform.

The study relies on the smokers' stated preferences, which are elicited from the Tobacco Consumption Survey in Vietnam in 2017-2018. We use data on actual purchases and the stated maximum prices that smokers are willing to pay for their cigarette brands to calculate conditional price elasticity at the individual level. Regression analysis then is used to quantify the extent to which income and other socioeconomic characteristics shape the smokers' price sensitivity.

Both the individual incomes and household incomes have negative and significant effects on the price elasticity of conditional demand for cigarettes. This effect is particularly strong after taking the product heterogeneity into account by considering only the most popular brand, but becomes smaller when looking at a more heterogeneous market by excluding that brand from the original sample. The magnitude of the impact of income adjusted for cigarette price is much higher than unadjusted income. The implication is that with sufficiently large variation in price across cigarette brands, which are often the case for countries with ad valorem tobacco excise tax structures, the low-income smokers may not be more sensitive to cigarette price than the high-income smokers so that a uniform percentage increase does not necessarily result in larger consumption fall for the low-income smokers. Narrowing the price gaps between cigarette brands by adding a specific tax component can help address this issue.

Raising tobacco tax can make the tax policy more progressive and benefit the poor more than the rich in Vietnam. Thus, the Government of Vietnam should switch from the current, purely ad valorem excise tax structure to the mixed system to reduce price variation and make the tobacco tax more progressive.