A London School of Economics-trained economist said a unitary tax system favors producers of expensive brands, a segment dominated by multinational tobacco companies.
“That’s why the European Commission, recognizing the health objectives of cigarette excises, simultaneously imposes 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,” Ernesto Gonzales, a post-graduate professor at the University of the Philippines-Manila, said.
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 the provisions of Republic Act No. 10351, or the sin tax reformed law, the Philippines is under a unitary tax regime where cigarettes are taxed P30 per pack regardless of classification (non-premium and premium).
Quoting the latest technical manual of the World Health Organization on tobacco tax administration, Gonzales noted ‘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,” he said.
He added “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.”
Gonzales supported former National Economic and Development Authority chief Romulo Neri, who cited the Seatca Tobacco Tax Index 2015 report showing only Brunei and Singapore out of 10 Southeast Asian countries had a unitary excise tax.
“He did not misuse data provided by Seatca but merely cited it objectively,” Gonzales said.