Taxation on cigarettes: a comprehensive analysis of the literature

Abstract

Taxing tobacco has three main goals: increase revenue, correct externalities and discourage consumption. Different policies may be undertaken which depend on the relevance governments give to each of the three goals. Current analysis presents a detailed review of the literature and explores the topic in its various developments within the economic literature. Demand is relatively inelastic and tax increase tends to raise revenue and discourage consumption. It has been observed that a great section of current literature supports the taxation of cigarettes based on correcting externalities. Conversely, three problems arise when cigarette taxation increases, of which the gravest is a rise in smuggling rates that surely accompany rise in taxation. Other problems are the regressivity of cigarette taxation and its impact on employment. In-depth research and an investigation on the various types of impact that tobacco has on society are essential for a balanced approach to the issue and for choosing the most appropriate solutions.