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A Taxing Dilemma: Assessing the Impact of Tax and Price Changes on the Tobacco Market

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Author Info

  • Ian Irvine

    (Concordia University)

  • William Sims

    (Concordia University)

Abstract

Sales of contraband cigarettes in Canada constitute a sizable component of the tobacco market. This illegal trade is associated with a loss in tax revenue and an array of illicit activities that involve gangs and organized crime. Various policy responses have been called for to counter this state of affairs. Increased policing and controls have resulted in the market share of the illegal product declining significantly to about 20 percent in 2010 from about one-third two years earlier. In addition to allocating more resources in order to control the problem, governments have been urged to lower tobacco taxes in the belief that lower relative prices for the legal product will induce smokers to switch in significant numbers away from the illegal supply source, perhaps also increasing tax revenues. This report analyzes the impact of tax and price changes on the composition of the cigarette market in the context of a demand-driven analytical model, in which smokers shift between legal and illegal products to a significant degree.

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Bibliographic Info

Article provided by C.D. Howe Institute in its journal C.D. Howe Institute Commentary.

Volume (Year): (2012)
Issue (Month): 350 (May)
Pages:

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Handle: RePEc:cdh:commen:350

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Keywords: Social Policy; Health Policy; Canada; contraband cigarettes; tobacco taxes;

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References

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  1. Ian J. Irvine & Van Hai Nguyen, 2009. "Toxic Choices: The Theory and Impact of Smoking Bans," Working Papers, Geary Institute, University College Dublin 200951, Geary Institute, University College Dublin.
  2. Moschini, GianCarlo & Meilke, Karl D., 1989. "Modeling the Pattern of Structural Change in U.S. Meat Demand," Staff General Research Papers, Iowa State University, Department of Economics 11266, Iowa State University, Department of Economics.
  3. Alexandre Laurin & William B.P. Robson, 2012. "Achieving Balance, Spurring Growth: A Shadow Federal Budget for 2012," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 344, March.
  4. Jay Bhattacharya & Neeraj Sood, 2011. "Who Pays for Obesity?," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 25(1), pages 139-58, Winter.
  5. James MacGee, 2012. "The Rise in Consumer Credit and Bankruptcy: Cause for Concern?," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 346, April.
  6. Charles A.M. de Bartolome, 2007. "Tax competition and the creation of redundant products," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 40(4), pages 1213-1236, November.
  7. Jérôme Adda & Francesca Cornaglia, 2006. "Taxes, Cigarette Consumption, and Smoking Intensity," American Economic Review, American Economic Association, American Economic Association, vol. 96(4), pages 1013-1028, September.
  8. Philip DeCicca & Donald S. Kenkel & Feng Liu, 2010. "Excise Tax Avoidance: The Case of State Cigarette Taxes," NBER Working Papers 15941, National Bureau of Economic Research, Inc.
  9. Deaton, Angus, 1987. "Estimation of own- and cross-price elasticities from household survey data," Journal of Econometrics, Elsevier, Elsevier, vol. 36(1-2), pages 7-30.
  10. William B.P. Robson, 2012. "What to do About Seniors' Benefits in Canada: the Case for letting Recipients Take Richer Payments Later," e-briefs, C.D. Howe Institute 131, C.D. Howe Institute.
  11. Jason M. Fletcher & Partha Deb & Jody L. Sindelar, 2009. "Tobacco Use, Taxation and Self Control in Adolescence," NBER Working Papers 15130, National Bureau of Economic Research, Inc.
  12. Charles A.M. de Bartolome & Ian J. Irvine, 2010. "The Economics of Smoking Bans," Working Papers, Geary Institute, University College Dublin 201027, Geary Institute, University College Dublin.
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