Unitary tax favors multinational cigarette companies – economist

A London School of Economicstrained 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, postgraduate professor at UP-Manila, said: “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 due to negligible gaps in retail prices.

Under provisions of Republic Act No. 10351 or the sin tax reformed law, the Philippines is now under a unitary tax regime where cigarettes are taxed R30 per pack regardless of classification (non-premium and premium).

“In fact,” said Gonzales, “the WHO manual, in page 45, indicates ‘an upwards substitutability (upshifting) 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 US 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% over-shifting (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.