Cigarette consumption, taxation and household income: Indonesia case study. HNP discussion paper: Economics of tobacco control paper no. 26
Publication Source

The World Bank

Discussion paper
South-East Asia
Economy status
Lower-middle-income economies

Cigarette consumption has been increasing in Indonesia, as in many other developing countries, causing a rising burden of disease and premature death. Higher excise taxes have proved effective in many countries in reducing cigarette consumption and raising government revenues. This study examines the effect of higher prices/taxes
on the decision to smoke, the quantity of cigarettes consumed by smokers in different income groups in Indonesia, and government revenues. It uses 1999 Social and Economic Survey (SUSENAS) household data, with households as the unit of analysis. There was at least one smoker in 57% of all households. Most households smoked kretek cigarettes with filters (64%), or without filters (31%). Average household monthly cigarette
consumption was 18 packs of 16 cigarettes. Per capita cigarette consumption was higher for higher income households: 7.83 packs per month, compared to 4 packs for lowincome households. On average, households spent 6.22 percent of their total income on cigarettes and kreteks, lower-income households spent the highest percentage.

The study suggests that price is not a significant factor in household decisions to smoke or not, but has a significant effect on the quantity of cigarettes smoked: each 10% increase in price would reduce total cigarette consumption by 6%. The reduction would be higher–nearly 7%–among low-income households, and lower–3%–among high income households. Cigarette consumption increases as income rises: a 10% increase in
household income would increase consumption by 6.5%, with a particularly strong effect among low-income households–a 9% increase–but little change among high income households–an increase of less than 1%.

Simulations show that a 10 percent tax increase that raised cigarette prices by 4.9% would reduce consumption by 3%, and increase tax revenues by 6.7%, ceteris paribus, including assuming no significant switching among cigarette products with different prices and tax levels. Despite the decrease in total consumption, the share of total household expenditures on cigarettes would increase slightly from 4.55% to 4.63%. Tax revenue would rise 6.7%. A 50 percent tax increase would raise tobacco tax revenues by 27.5 percent. (To the extent that there is substitution from cigarettes and kreteks with higher to lower taxes, the increase in total taxes would be lower.)