Last November, I got a birthday gift from the International Monetary Fund: my very own copy of “How to Design and Enforce Tobacco Excises?” I don’t blame you for missing it—it came out 5 days before the US election.
I was quite pleased to see it. I’ve been asking for an IMF statement on tobacco taxes for years. And there, finally, it was in my inbox. It was a little bland and scuffed in a few places, but it is still a workable guide to issues that come up when a country decides to raise tobacco taxes. I do admit, though, I felt a little bit like I had asked for a racecar and received a used pickup truck.
Don’t get me wrong. This technical note is actually very important. As far as I know, this is the first public statement from the IMF on tobacco taxes since 1999 (see the appendix to “Curbing the Epidemic” and an article in Finance & Development). And tobacco taxes are possibly the single most effective public health policy in the world.
And that is exactly how the technical note falls short. While it recognizes the health effects of reducing tobacco consumption, the technical note never addresses how you would make sure that tobacco taxes reduce smoking. (As I’ll discuss below, good resources on this are available).
But let’s start by looking at what the IMF technical note does well.
The IMF said it! They put it in writing: tobacco taxes are a legitimate tool of public policy to reduce deaths attributable to smoking. Don’t let anyone ever tell you that the IMF opposes tobacco taxes. It just isn’t so.
The guide explains the features of tobacco taxes that will have an impact on how much revenue it can raise, especially key characteristics of demand and existing price and tax levels.
The guide provides a concise comparison of ad valorem and specific taxes. That is, between taxes that are a percentage of the sales price and those that are fixed by quantities or weight.
The guide provides a good overview of what it takes to administer a tobacco tax, alerting policymakers to the range of information, procedures, and enforcement mechanisms needed for effective implementation.
- Finally, the guide presents a balanced view of earmarking—the practice in some places of reserving tobacco taxes for particular expenditures.
Now, at the risk of looking a gift horse in the mouth, here’s why I was less than thrilled.
The IMF had an opportunity to make a much stronger statement in support of the 180 countries who have committed themselves to reducing smoking by raising taxes as parties to the Framework Convention on Tobacco Control (FCTC). Several years ago, the IMF was planning to issue just such a policy on tobacco taxes; but after years of delay, it has opted instead for a low-level, almost invisible, “how to” guide.
Smoking causes more than five million deaths each year, 80 percent of them in low- and middle-income countries (LMIC). Yet cigarette excise taxes are only 38 percent of the final price in these countries—about half the level recommended by WHO and the World Bank. Furthermore, the number of smokers is still increasing in many countries (e.g., Indonesia) wherever rising incomes are making cigarettes more and more affordable.
Aside from giving the issue too little prominence, the IMF technical note never directly addresses what tobacco taxes should look like if their primarily goal were to reduce deaths from smoking. The technical note has an entire section on maximizing revenue which mentions health goals but barely addresses what tax policy should be if a country’s primary concern is public health. It is like issuing advice on monetary policy that fully addresses inflation but treats unemployment as a secondary concern.
And countries do care about the public health effects of tobacco. Almost every country in the world is a party to the FCTC. The IMF’s primary mandate may be economic stability and support for effective macroeconomic policies, but its work on inequality and gender and trade demonstrates that it recognizes it has a role in advising fiscal policies that support of its member states’ public goals. If a tobacco tax were designed to reduce consumption to zero, it would be a public health success and a revenue dud—but the fact that tax instruments are involved would still make it a concern for applying the expertise of the IMF.
Where good advice can go awry
In several places, the technical note advocates incremental increases in taxes so that policymakers can assess the market response and make appropriate adjustments. Yet behavioral economic studies have shown that consumers respond more strongly to large changes in prices than small ones. Thus, the choice between incremental increases and abrupt ones look straightforward when focusing on revenue, but create a large tradeoff with the goal of reducing smoking. Countries like France, Australia, and the Philippines understand this and have committed to increasing cigarette prices above inflation in order to drive down consumption.
Another example comes in the treatment of smuggling. Tobacco taxes won’t affect revenue or smoking as much if significant smuggling occurs. Thus, the IMF technical note raises concerns and illustrates them with a cautionary tale from Canada. There, tax increases were followed by an upsurge in smuggling. The Canadian tale is told in the blandest language imaginable for a case that involved tobacco companies shipping their products to the United States and re-importing them into Canada without tax or duties, while shamelessly using the evidence of smuggling to lobby for reducing tobacco taxes! Similar practices discovered and punished by Canada in the 1990s recurred in the United Kingdom and the European Union. Tobacco companies used the Canadian example to scare finance ministries around the world, often successfully. So the very first thing countries should know about controlling smuggling is to start by more strictly monitoring the actions of legal tobacco companies.
If you’re looking for more on tobacco taxes…
Other resources give a much better guide to tobacco taxes, addressing both public health and economic policy. An excellent compact source of information on tobacco taxes came out in 2015 (“Global Hazards of Tobacco and the Benefits of Smoking Cessation and Tobacco Taxes”). By coincidence, the National Cancer Institute (NCI) and WHO has also just published a monograph on The Economics of Tobacco and Tobacco Control.
Here are some of the things that you would not know after reading the IMF technical note on tobacco excise taxes but which are prominently stated in the summary of the NCI/WHO monograph.
- In 2013–2014, governments raised almost US$269 billion with tobacco taxes
- The European Union and 53 countries have signed the Protocol to Eliminate Illicit Trade in Tobacco Products, strengthening control over the tobacco supply chain and coordinating global efforts.
- The global tobacco market has become increasingly concentrated over the past 25 years.
- Tobacco control does not harm economies.
- Tobacco causes disproportionate harm for poor people and, conversely, tobacco control disproportionately benefits them.
- More reliance on high, uniform, and specific excise taxes on tobacco products will have the greatest public health impact.
So if you’re looking for a guide to tobacco excise taxes, you’re better off reading “Global Hazards” or the NCI/WHO monograph. However, if you’re trying to convince a Finance Ministry official, you might want to bring along the IMF’s 1999 Finance & Development article and the 2016 technical note. They show that the IMF is engaged and supportive (even if they can’t accelerate to 60 miles per hour in 60 seconds).
CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.