Public finances and tobacco taxation with product variety: Theory and application to Senegal and Nigeria

Theophile T. Azomahou*, Racky Balde, Abdoulaye Diagne, Pape Yona Mane, Ibrahima Sory Kaba

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

Abstract

This study endeavors to answer two questions: which category of excise taxes is more appropriate for Senegal and Nigeria and which consequences an increase of the tobacco taxes would have on the price, the demand and the tax revenues in each one of the two countries? To answer these questions, we adopt a double approach: first, a theoretical model of taxation with variety; and second, a simulation model to answer the second question. The results of the theoretical model indicate that, in the context of excise taxation, the number of products variety-or that of cigarette brands-directly affects both the degree of market concentration and the marginal effects of specific and ad valorem excise taxes on the price of tobacco. In addition, the comparison of the marginal effects of ad valorem and specific excise taxes depends on the marginal costs of production of different varieties weighted by the tax rates and the number of varieties. Our empirical results first show that the specific excise taxes are more adapted to Senegal while ad valorem excise taxes fit best Nigeria. This result crucially matters for the excise taxes are exclusively of an ad valorem nature in both Senegal and Nigeria. It is perfectly possible to envisage a situation where the two main forms of excise taxes could co-exist. It also appears from our results that tax development does not have the same implications for the two countries. Increasing tobacco taxes in Senegal strongly reduces the demand, but also induces a decrease in the tax revenues, while this will imply a lesser decline in demand in Nigeria accompanied however by a sharp increase of the country's tax revenues. This difference stems from the fact that the priceelasticity of tobacco demand is very high in Senegal, contrary to Nigeria. Finally, it is important to mention that there is a specific threshold beyond which the tax increases cease to have a positive effect on tax revenues in Nigeria.
Original languageEnglish
Article number0212015
Number of pages21
JournalPLOS ONE
Volume14
Issue number2
DOIs
Publication statusPublished - 14 Feb 2019

Keywords

  • HEALTH
  • TAXES
  • EXCISE
  • POLICY

Cite this

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title = "Public finances and tobacco taxation with product variety: Theory and application to Senegal and Nigeria",
abstract = "This study endeavors to answer two questions: which category of excise taxes is more appropriate for Senegal and Nigeria and which consequences an increase of the tobacco taxes would have on the price, the demand and the tax revenues in each one of the two countries? To answer these questions, we adopt a double approach: first, a theoretical model of taxation with variety; and second, a simulation model to answer the second question. The results of the theoretical model indicate that, in the context of excise taxation, the number of products variety-or that of cigarette brands-directly affects both the degree of market concentration and the marginal effects of specific and ad valorem excise taxes on the price of tobacco. In addition, the comparison of the marginal effects of ad valorem and specific excise taxes depends on the marginal costs of production of different varieties weighted by the tax rates and the number of varieties. Our empirical results first show that the specific excise taxes are more adapted to Senegal while ad valorem excise taxes fit best Nigeria. This result crucially matters for the excise taxes are exclusively of an ad valorem nature in both Senegal and Nigeria. It is perfectly possible to envisage a situation where the two main forms of excise taxes could co-exist. It also appears from our results that tax development does not have the same implications for the two countries. Increasing tobacco taxes in Senegal strongly reduces the demand, but also induces a decrease in the tax revenues, while this will imply a lesser decline in demand in Nigeria accompanied however by a sharp increase of the country's tax revenues. This difference stems from the fact that the priceelasticity of tobacco demand is very high in Senegal, contrary to Nigeria. Finally, it is important to mention that there is a specific threshold beyond which the tax increases cease to have a positive effect on tax revenues in Nigeria.",
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Public finances and tobacco taxation with product variety : Theory and application to Senegal and Nigeria. / Azomahou, Theophile T.; Balde, Racky; Diagne, Abdoulaye; Mane, Pape Yona; Kaba, Ibrahima Sory.

In: PLOS ONE, Vol. 14, No. 2, 0212015, 14.02.2019.

Research output: Contribution to journalArticleAcademicpeer-review

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T2 - Theory and application to Senegal and Nigeria

AU - Azomahou, Theophile T.

AU - Balde, Racky

AU - Diagne, Abdoulaye

AU - Mane, Pape Yona

AU - Kaba, Ibrahima Sory

N1 - data source:

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KW - HEALTH

KW - TAXES

KW - EXCISE

KW - POLICY

U2 - 10.1371/journal.pone.0212015

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M3 - Article

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JF - PLOS ONE

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