Price, Tax and Cigarette Smoking: Simulations of China¡¯s Tobacco Tax Policy

This paper explains the tobacco tax structure and cigarette pricing mechanism in China, develops a general analytical framework for analyzing the Chinese tobacco turnover tax system, and examines the effects of 2009 tobacco tax adjustment on cigarette prices and tax revenue. We find that although the tax is not the most important factor determining cigarette retail prices, the tobacco tax does significantly affect the tobacco industry¡¯s profits under the current tobacco monopoly system in China. Therefore, the adjustment of the tobacco excise tax in 2009 did not raise cigarette retail prices, instead government tax revenue increased. In other words, the net result of the tax adjustment was a transfer of the tobacco industry¡¯s profit to government tax revenues. Profit margins ultimately determine cigarette wholesale and retail prices. From the perspective of tobacco control, China needs to reform its tobacco tax system and collect taxes at the retail level to increase overall cigarette retail prices, as well as reduce the government¡¯s monopolization over cigarette productions and sales.