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

• Date: 01 August 2018
• DOI: http://doi.org/10.1111/rode.12514
• Published date: 01 August 2018
• Author: Serhan Cevik

REGULAR ARTICLE

Smoke screen: Estimating the tax pass-through to

cigarette prices in Pakistan

Serhan Cevik

International Monetary Fund,

Washington, D.C

Correspondence

Serhan Cevik, International Monetary

Fund, 700 19th Street, NW, Washington,

D.C. 20436

Email: scevik@imf.org

Abstract

This article estimates and compares the speed and magni-

tude 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 observa-

tions 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 under-

shifted 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.

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INTRODUCTION

Tax policy and administration can have a direct effect on retail prices and influence the behavior

of consumers. In the case of tobacco products, the effective taxation helps raise revenue for the

government and functions as a public health policy tool to discourage cigarette consumption.

The International Monetary Fund retains copyright and all other rights in the manuscript of this article as submitted for pub-

lication.

DOI: 10.1111/rode.12514

Rev Dev Econ. 2018;22:e1–e15. wileyonlinelibrary.com/journal/rode ©2018 John Wiley & Sons Ltd

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