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Home > Economics of tobacco: an analysis of cigarette demand in Ireland.

Kennedy, Sean and Pigott, Victor and Walsh, Keith (2015) Economics of tobacco: an analysis of cigarette demand in Ireland. Dublin: Office of the Revenue Commissioners.

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Over the past decade consumption of Irish taxed cigarettes has halved. For most of this period, the evidence suggests that smoking had declined only marginally as smokers increasingly substituted to alternative products. However, recent data indicate that smoking prevalence has reduced substantially in the last two years.

A set of rigorous econometric models are employed to estimate the price elasticity of demand for taxed cigarette consumption in Ireland. According to the modelling results, the elasticity ranges from -1.6 to -2.0, averaging at -1.8. The interpretation is that a 10 per cent increase in the price of cigarettes is associated with a decline in the consumption of taxed cigarettes of 18 per cent on average.

High elasticity is indicative of a strong response by consumers of taxed cigarettes to price changes. The evidence suggests that this high responsiveness in Ireland was largely driven by a substitution to alternative tobacco products, including legitimate cross border purchases and untaxed cigarettes. However, recent falls in prevalence rates indicate that a major part of the responsiveness now driving the elasticity may be from smokers quitting (or reducing smoking) rather than substitution to other products.

The elasticity results have policy implications. They suggest that a tobacco tax increase could lead to an overall reduction in the Exchequer receipts associated with cigarettes. Taken together with more traditional inelastic estimates, the elasticities in this analysis offer a potential range for estimating the impact of tax changes on receipts.

Independent research by Ipsos MRBI estimates that non-Irish duty paid cigarettes account for 17 per cent of the market in 2014, with a potential tax loss €214 million. This remains the most accurate and robust measure of the tax loss in the cigarette market but an alternative approach based on the results in this paper suggests it could be considered as a possible upper bound or ceiling.

The focus of this paper is the likely effects of tax changes on cigarette consumption and the associated tax revenues. There are established adverse effects of tobacco and cigarette smoking on public health and Government may wish to continue to use fiscal policies such as taxation in the pursuit of health goals rather than solely securing tax receipts. The prevention and detection of illegal smuggling and trading of cigarettes remains an operational imperative for Revenue in the coming years.

Item Type
Report
Publication Type
Irish-related, Report
Drug Type
Tobacco / Nicotine
Date
2015
Pages
33 p.
Publisher
Office of the Revenue Commissioners
Place of Publication
Dublin
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