Risk-proportionate taxes of smoke-free alternatives can raise gov't revenue, reduce smoking, and illicit trade - experts

Philippines | National

Risk-proportionate taxes of smoke-free alternatives can raise gov't revenue, reduce smoking, and illicit trade - experts

By Manila Bulletin Newsroom

Dr. Arthur Laffer

Adopting risk-proportionate taxes on smokefree nicotine products—such as vapes,

heated tobacco and nicotine pouches—can help increase government revenues,

accelerate declines in smoking rates while weakening the grip of illicit trade, by making

less harmful alternatives more accessible and reducing incentives for smuggling,

according to two world-renowned economists.

“The Philippine government should adopt data-driven taxation policies that strike a

balance between fiscal sustainability and public health goals. Find that sweet spot

where you have just the right taxation, you discourage as many smokers as possible

without losing them to illicit tobacco, and you collect revenues to implement [tobacco

control] programs,” said Dr. Arthur Laffer, founder and chairman of Laffer Associates, an

economic research and consulting firm.

Dr. Laffer is a former member of President Ronald Reagan’s Economic Policy Advisory

Board and the author of the Laffer Curve theory, which describes the tradeoff between

tax rates and the total tax revenues collected by the government.

“Countries that have significantly lowered their smoking rates implement simplified, risk-

proportionate tax systems that influence consumers to move away from combustible

cigarettes and switch to reduced-risk alternatives,” said Prof. Ashok Kaul.

A significant differential in tax rate between cigarettes and alternatives is good,

according to Kaul. “It encourages switching,” he added.

Prof. Kaul has served as a Delegate for Germany at the Organisation for Economic Co-

operation and Development (OECD), focusing on international tax policy reform, and

acted as a lead scientist on Double Taxation Agreements for the German Ministry of

Finance.

Dr. Laffer emphasized that smoke-free nicotine products are crucial in reducing

smoking-related harm, providing less harmful options for people who struggle to quit

through approved therapies. “Set a lower tax for such products to encourage more

smokers to switch to less harmful alternatives,” he said.

Prof. Kaul pointed to Sweden’s risk-proportionate tax model that keeps taxes

differentiated on smoke-free alternatives and combustible cigarettes. In just 15 years,

smoking rates fell from 15 percent to 5.3 percent, with Sweden poised to become the

first smoke-free nation. Tobacco-related deaths in Sweden are far below the European

average, and Swedish men have among the lowest rates of smoking-related disease in

the European Union.

“Many Swedes stopped smoking, but even more switched [to smoke-free alternatives].

And now Sweden has, among the European countries, the lowest lung cancer rate by

far. So, you can see what good policies can achieve,” Prof. Kaul said.

Dr. Laffer warned that annual increases in excise tax rates in the Philippines have led to

declining government revenues and a rise in illicit tobacco trade. Research from the

University of Asia and the Pacific (UA&P) shows a clear link between stricter tobacco

laws and the growth of the illicit cigarette trade in the country.

“The data strongly suggest that the Philippines has gone too far in increasing tobacco

tax rates. If you overtax a product, you lose control of the market, you lose revenues,

you have more people buying illicit cigarettes,” the American economist said.

He noted that the exact situation unfolded in Ireland where steep increases in annual

tobacco excise taxes resulted in a sharp drop in government revenues that coincided

with a spike in customs seizures of illicit cigarettes. Smoking prevalence in the country

did not decline during this period.

Prof. Kaul stressed that risk-proportionate taxes on smoke-free alternatives combined

with strong law enforcement can spur innovation and influence consumers to move

away from combustible cigarettes while undermining illicit trade.

Philippines | National

Risk-proportionate taxes of smoke-free alternatives can raise gov't revenue, reduce smoking, and illicit trade - experts

By Manila Bulletin Newsroom

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Philippines | National

Risk-proportionate taxes of smoke-free alternatives can raise gov't revenue, reduce smoking, and illicit trade - experts

By Manila Bulletin Newsroom

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