Smoke screen: Estimating the tax pass‐through to cigarette prices in Pakistan

This article estimates and compares the speed and magnitude of the tax pass‐through across major cigarette brands at different price points (budget, mainstream, and premium) in Pakistan by using a novel dataset of monthly observations on cigarette prices in 50 cities during the period 2004 to 2015. The empirical analysis indicates that the pass‐through of cigarette taxes to the final consumer price is fast but incomplete in Pakistan. The pass‐through coefficient is estimated to be in the range of 70 to over 90 percent across four major cigarette brands, and most of the pass‐through occurs contemporaneously within a period of 2 months. The results imply that a 1‐Pakistan rupee (PR) increase in taxation leads to an increase of PRs 0.8, on average, in cigarette prices. In other words, cigarette taxes are undershifted to consumers in Pakistan. With respect to the tax pass‐through at different price tiers (budget, mainstream, and premium), I find significant variation in the pass‐through coefficient, which is close to one for the premium cigarette brand and significantly lower for the budget and mainstream cigarette brands.