• ‘Unitary tax system favors cigarette multinationals’

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    A London School of Economics-trained economist, quoting the latest technical manual (Chapter 2) of the World Health Organization (WHO) on Tobacco Tax Administration, said a unitary tax system favors producers of expensive brands, a segment dominated by multinational tobacco companies.

    Dr. Ernesto R. Gonzales, post-graduate professor at University of the Philippines-Manila, added, “That’s why the European Commission, recognizing the health objectives of cigarette excises, simultaneously impose two types of taxes on tobacco—a specific tax to set a minimum floor which is high enough to discourage smoking and an ad valorem tax for progressivity.”

    Gonzales cautioned lawmakers and pro-health advocates that they might be overlooking the issue of upshifting to premium brands under a unitary tax regime because of negligible gaps in retail prices.

    Under provisions of Republic Act 10351 or the sin tax reform law, the Philippines is now under a unitary tax regime where cigarettes are taxed P30 per pack regardless of classification (non-premium and premium).

    “In fact,” Gonzales said, when the price gap between cheaper and more expensive brands narrows, the price increase, due to higher taxation, may alter consumers’ marginal willingness to pay for product ‘quality’ subject to income.”

    According to him, “the hypothesis that the market share of lower-priced cigarettes falls when specific excises increase, as the relative price between higher- and lower-priced cigarettes is reduced, is supported by empirical evidence. Sobel and Garrett (1997) find that increases in specific taxes reduced the market share of generic (lower-priced) brands in the U.S. significantly.”

    The manual further states: “Theory shows that profits are relatively higher under specific taxation (e.g. Delipalla and Keen, 1992). Moreover, a tax increase may lead to an increase in profits. More than 100 percent overshifting (i.e. prices rise by more than the tax increase itself) is a requisite for an increase in profits: as a higher tax increases consumer price and reduces demand, for profits to rise, the after-tax mark up must rise. It is not therefore surprising that tobacco multinationals prefer specific taxes.”

    Philip Morris International’s (PMI) 2015 annual report (page 57) supports this upshifting trend, “The decline in our cigarette shipment volume reflected the lower total market combined with lower consumption of our low and super-low price brands, following price increases in late 2014 and early 2015, partly offset by higher market share, driven by adult smoker uptrading (upshifting) to Marlboro, combined with market share growth of Fortune, reflecting the narrowing of retail price gaps with brands at the bottom end of the market.”

    Collated data in the same page of the report also showed that Marlboro sales in the Philippines increased by 2.7% that roughly translates into billions of pesos.

    Gonzales supported former National Economic and Development Authorit chief Romulo Neri’s statement that Table 1 of SEATCA Tobacco Tax Index 2015 report shows only Brunei Darussalam and Singapore out of 10 Southeast Asian countries with a unitary excise tax.

    “He did not misuse data provided by SEATCA but merely cited it objectively,” he pointed out.

    “Comparatively,” Gonzales said, “Page 36 of the WHO manual shows a table that out of 182 countries, 60 used ad valorem [according to value], 48 used mix ad valorem and specific excise tax system while specific (unitary or multi-tier) excise tax are applied in 55 countries and 19 have no excise taxes at all.”

    In concluding his argument, he pointed out that the two-tier tax rates under House Bil. 4144 are higher than the current unitary tax rate and is pro-health since poor smokers are more elastic to price changes, thus a P32 tax (under two-tier) is more discouraging than a P30 rate while noting that poor smokers are sensitive to price increases.

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