Promoting convergence and closing gaps using affordability-based minimum taxes: an illustration using the European Union Tobacco Tax Directive

Abstract

Background: The rules governing tobacco taxation in the European Union (EU) are currently under revision. Earlier research has proposed reforms aimed at stimulating price convergence across countries by linking national minimum taxes to a measure of average prices across the EU. This paper proposes that revised tax rules include an affordability criterion whereby minimum taxes are required to be no less than a common prespecified fraction of domestic average disposable income.

Methods: Longitudinal data on prices and taxes on factory-made cigarettes and roll-your-own tobacco in 24 EU member states and the UK between 2011 and 2019 are used to estimate econometric models for their weighted average prices as a function of taxes. Two scenarios are simulated with the models' estimates: a baseline scenario for the actual tax stance pertaining to 2020 and a reform scenario implementing an additional affordability criterion.

Results: The affordability criterion would significantly increase the price of both tobacco products, particularly in richer countries with relatively low tobacco prices that are often not affected by the increases in nominal minima mandated by the EU rules. There would also be some price convergence between the two tobacco products, both on average and in the majority of countries.

Conclusions: Such results show an affordability criterion could be a potentially fruitful complement to the tax reforms proposed in earlier research.

Keywords: economics; price; public policy; taxation.