Designing an Optimum Fiscal Policy for Tobacco to Maximise the Tax Revenue, Social Savings and the Net Monetary Benefits in Sri Lanka

Abstract

Background Fiscal policy targeting tobacco control is identified as the most effective strategy for rapid control of tobacco use. An optimum fiscal policy to estimate the percentage taxation that will maximise the government tax revenue, social savings and the net monetary benefit has not been empirically designed before in Sri Lanka. Methods A model was developed using Microsoft Excel 2016, utilizing up-to-date published evidence on the cigarette sales, current fiscal policy, social cost of tobacco use, consumer response and the price elasticity of cigarettes. Univariate estimates on the expected revenue from tobacco tax, average annual social savings and the net monetary benefit were predicted for different levels of tobacco taxation. A deterministic sensitivity analysis was performed covering all possibilities. The percentage taxation maximizing the government tax revenue and the net monetary benefit were identified. Results It was estimated that a further 30% tax increase from the 2019 baseline will generate approximately LKR 3544 million per year of additional tax revenue for the government while saving LKR 28 069 million per annum as social savings. A fiscal elevation of 50% will produce identical annual tax revenue to that of 2018, while securing a social saving of more than LKR 47 600 million per annum. The maximum net monetary benefit is achievable at an overnight tax increase of 90% from the baseline, however with a short-term compromise in tax revenue. Conclusion The well-defined thresholds take tobacco taxation advocacy in Sri Lanka a step forward and will assist the government in taking an informed decision on its fiscal policy for cigarettes.

Keywords

• optimum tobacco taxation
• tobacco tax sri lanka
• tobacco control