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The substitution effect of cigarette excise tax for tobacco leaf tax in China

Author

Listed:
  • Hailong Cai
  • Xiuqing Wang

Abstract

Purpose - The purpose of this paper is to examine the increase in the cigarette excise tax needed to keep tax revenue constant in the face of the cancellation of the tobacco leaf tax. Design/methodology/approach - Equilibrium-displacement model was employed to simulate the substitution effect. Findings - The results suggest the “substitution effect elasticity (SEE)” is between -0.127 and -0.063. This means a 100 per cent cut in the tobacco leaf tax rate would necessitate an increase in the cigarette excise tax rate of between 6.3 and 12.7 per cent. Sensitivity analysis indicates SEE is most sensitive to the retail demand elasticity and oligopoly power and least sensitive to input substitution elasticity and returns to scale. Originality/value - This paper provides a framework to analyze the policy effects of the Chinese tobacco industry. The findings in this study are very important for government to make policies in the future.

Suggested Citation

  • Hailong Cai & Xiuqing Wang, 2010. "The substitution effect of cigarette excise tax for tobacco leaf tax in China," China Agricultural Economic Review, Emerald Group Publishing, vol. 2(4), pages 385-395, November.
  • Handle: RePEc:eme:caerpp:v:2:y:2010:i:4:p:385-395
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    References listed on IDEAS

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    1. S McCorriston & CW Morgan & AJ Rayner, 2001. "Price transmission: the interaction between market power and returns to scale," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 28(2), pages 143-159, June.
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    3. Xiuqing Wang & Habtu Tadesse & Tony Rayner, "undated". "Price Transmission, Market Power And Returns To Scale: A Note," Discussion Papers 06/07, University of Nottingham, School of Economics.
    4. Waterson, Michael, 1980. "Oligopoly and derived demand," Economics Letters, Elsevier, vol. 5(2), pages 115-118.
    5. Habtu Tadesse Weldegebriel, 2004. "Imperfect Price Transmission: Is Market Power Really to Blame?," Journal of Agricultural Economics, Wiley Blackwell, vol. 55(1), pages 101-114.
    6. BISHOP, John A. & Liu, Haiyong & Meng, Qi, 2007. "Are Chinese smokers sensitive to price?," China Economic Review, Elsevier, vol. 18(2), pages 113-121.
    7. Sanjib Bhuyan & Rigoberto A. Lopez, 1997. "Oligopoly Power in the Food and Tobacco Industries," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(3), pages 1035-1043.
    8. Bai Yuanliang & Zhang Zongyi, 2005. "Aggregate cigarette demand and regional differences in China," Applied Economics, Taylor & Francis Journals, vol. 37(21), pages 2523-2528.
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