In El Salvador, 8.8% of adults 15 years and older smoke cigarettes. Little is known about the sensitivity of cigarette consumption among the adults in El Salvador to tax and price increases and income growth.
Elasticities are estimated using Deaton’s Almost Ideal Demand System model applied to data from the National Household Income and Expenditure Survey 2005/2006 for the total population and separately for income groups. The estimates are then used to simulate the effects of a proposed change in tobacco tax policy on cigarette consumption and tax revenue.
The estimated price elasticities (-0.77 for the total population) are within the range of price elasticity estimates available for low and middle-income countries. Given the estimated elasticities, a tobacco tax increase is expected to reduce the number of smokers (by almost 20%) and increase tobacco tax revenue (by more than 50%).
Increasing tobacco taxes has the potential to decrease consumption in El Salvador and raise fiscal revenues. The tobacco tax burden in El Salvador is one of the lowest in Latin America and the social costs of tobacco consumption largely exceed the tobacco tax revenues. An increase in tobacco tax could significantly decrease the number of smokers and reduce the burden of tobacco-related diseases and deaths.