Assessing Cigarette Reduction Tax-Effectiveness in Low Tobacco Expenditure Contexts: An Application to Bolivia

In this research we show that ambitious increases in tobacco tax rates can substantially reduce tobacco consumption, increase fiscal revenue, and provide net positive social benefits even in contexts of low consumption prevalence and intensity. Low nicotine intake still constitutes a grave disease risk factor, and the effectiveness of tax increases might be questioned if income effects are small. We adapt spatial variation of price methodologies to deal with low prevalence and intensity, censored data, and small samples using the Bolivian case as an illustration. We find an average price elasticity of demand of $-0.69$ to $-0.76$ . Using our estimates of elasticities, we develop a simulation to anticipate the effects of a 35% yearly increase of the Bolivian specific excise on tobacco starting in 2025. Our estimates show that by 2030, this reform could reduce the consumption of cigarettes by 52.6%, diminish the prevalence of smoking by 30.6%, and increase fiscal revenue by $123 million over six years. Moreover, we estimate that the abated direct medical costs of reduced consumption net of the deadweight loss associated with a tax increase would generate a net social gain of over $100 million in five years.