China Agricultural Economic Review
The purpose of this paper is to examine the increase in the cigarette excise tax needed to keep tax revenue constant in the face of the cancellation of the tobacco leaf tax.
Equilibrium-displacement model was employed to simulate the substitution effect.
The results suggest the “substitution effect elasticity (SEE)” is between 20.127 and 20.063. This means a 100 per cent cut in the tobacco leaf tax rate would necessitate an increase in the cigarette excise tax rate of between 6.3 and 12.7 per cent. Sensitivity analysis indicates SEE is most sensitive to the retail demand elasticity and oligopoly power and least sensitive to input substitution elasticity and returns to scale.
This paper provides a framework to analyze the policy effects of the Chinese tobacco industry. The findings in this study are very important for government to make policies in the future.