PH tobacco taxation a classic cases of Laffer Curve, says US economist

Dr. Arthur Laffer, founder and chairman of Laffer Associates, an economic research and consulting firm MANILA, Philippines – The Philippines illustrates the Laffer Curve in action, as annual increases in excise tax rates have led to declining government revenues and a rise in illicit tobacco trade, according to a renowned American economist. “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,” 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. Article continues after this advertisement The Philippine government’s excise tax collections increased substantially after the enactment of the Sin Tax Reform Law in 2012, the Tax Reform for Acceleration and Inclusion Law (TRAIN Law) in 2017, and the Tobacco Tax Law in 2019. Under the country’s tobacco tax structure, a yearly tax increase of P5.00 per cigarette pack was imposed from 2017 to 2023. A perpetual 5% annual increase in excise taxes took effect starting in 2024. Government revenues peaked from P126 billion in 2017 to P176 billion in 2021. Since then, despite annual tax increases, revenues have declined to P160 billion in 2022, P135 billion in 2023, and P134 billion in 2024. A study by the University of Asia and the Pacific (UA&P) found a direct correlation between the implementation of tobacco-related laws and the rise of the illicit cigarette trade in the Philippines. Article continues after this advertisement It revealed that in the decade following the enactment of these laws, unregistered and counterfeit cigarette brands have consistently held double-digit market shares. This surge in illicit trade resulted in estimated losses of approximately P22 billion in tax revenues and P 84 billion in product value. Article continues after this advertisement The economic impact is further compounded by multiplier effects, including losses of P118.4 billion in output, P115.5 billion in value-added, P49.7 billion in household income and 210,497 jobs in 2022, according to the study “What’s happening in the Philippines is exactly what happened in Ireland and Singapore,” Dr. Laffer noted. From 2000 to 2009, the Irish government increased the tobacco excise tax by 107 percent, translating to a 29 percent hike in the retail sale prices of cigarettes. However, government revenues declined by 33 percent over the same period, while illicit cigarette consumption spiked dramatically in 2009, accounting for almost a quarter of total cigarette consumption in Ireland that year. Moreover, the government’s health objectives were not met, as smoking incidence did not decline. As a result, the Irish government decided to freeze its excise tax policy at the end of 2009. Singapore imposed steep annual excise tax hikes totaling 125 percent from 2000 to 2005, resulting in up to a 67 percent increase in cigarette retail prices. Excise tax revenues rose steadily until 2003, after which revenues started declining, coinciding with a marked increase in customs seizures of illicit cigarettes. As with Ireland, smoking incidence in Singapore remained the same during this period. The Singapore government eventually changed its policy and froze excise tax rates between 2005 and 2013. “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. Laffer. He acknowledged the role of innovative smoke-free nicotine delivery systems, such as heated tobacco products, in reducing harms caused by smoking while providing nicotine to people who cannot or do not want to quit smoking by themselves or with currently approved methods. Your subscription could not be saved. Please try again. Your subscription has been successful. “Set a lower tax for such products to encourage more smokers to switch to less harmful alternatives,” said Dr. Laffer.