Analysis of taxes on cigarettes in the reverse of flexibility rule: An application on Turkey

According to the World Health Organization (WHO); smoking causes the death of eight million people every year, including passive smokers, and creates high economic costs due to diseases attributable to smoking. In this context, cigarette is among the problems that need to be tackled and taxes come to the forefront in this struggle. Smoking addiction are expected to reduce its consumption of cigarettes in response to the increasing price after high rates of tax on cigarettes. Diseases and deaths caused by smoking decrease due to the reduce in cigarette consumption. In addition, taxes on cigarettes are seen as a resource of income for the government. On the other hand, high taxation of cigarettes is considered as an effective policy in the context of reverse flexibility rule (Ramsey Rule). The basis of the reverse flexibility rule is the high taxation of consumer goods with inelastic demand. The relatively inelastic demand for cigarettes causes cigarette addicts to have smoking preferences to be neutral against the price increase after tax. The welfare loss arising from the tax is also minimal. Therefore, high taxation of cigarettes provides the principle of effectiveness to a large extent. On the other side, there are discussions that cigarette consumption is more intense, especially low-income addicts will disproportionately bear the tax burden that will occur, and thus the regressive aspect of the tax will arise. However, under the assumption that low-income addicts are more sensitive to the price increase after tax, it is foreseen that they will reduce cigarette consumption and the regressive effect of the tax will remain at minimum level. This study examined the responses of resident households in Turkey are against the tax increase levied on cigarettes. To this end, over Household Budget Survey (HBA) applied to households, containing individual and consumption information carried out by Turkey Statistical Institute for 1 January-31 December 2017 period were used. Firstly, the effect of the household head in 12153 households included in the 2017 Household Budget Survey on gender, age, education level, marital status, occupation, income level and the probability of smoking in household size was determined by using logistic regression method. Then, the effects of the increase in taxes on cigarettes using cigarette consumption data of 2016 and 2017 Household Budget Survey on cigarette consumption were discussed within the framework of different income groups. According to the empirical findings obtained, age, education, gender, marital status, occupation and household size in Turkey seem to significantly affect the probability of cigarette consumption. In addition, the increase in taxes on cigarettes; it appears to reduce cigarette consumption among low, middle and high income households, however, this effect seems to be higher in low and middle income households. In Turkey, in this context one can argue that the minimum level of the regressive impact of the increase in the tax on cigarettes.