The impact of excise tax increases on cigarette consumption and government revenue in Tanzania from 1998 to 2008

This study investigate the impact of cigarette excise tax increase on cigarette consumption and government revenue in Tanzania in the 1998-2008 period using quarterly time series data. In the recent years cigarette excise taxation has emerged as one of the controversial topics worldwide. The adverse health effects associated with cigarette consumption has spurred some debates on how best to minimize cigarette consumption especially among the youth. One of the common tools used has been to increase excise tax rates on tobacco products. However, this measure has significant impact on developing economies which still depend on revenue from excise taxation. Ordinary least squares (OLS) is employed in estimation of demand models. Both short- and long-run price model estimation result show that increase of real cigarette excise tax is responsible for about 40 percent increase in real price. Furthermore, estimated demand models reveal that cigarette is a normal good and has inelastic own-price elasticities. In addition, revenue-maximising tax rates for cigarettes are high in the short run and long-run. The findings of this study show that cigarette demand is price inelastic and that more cigarette excise tax revenue can be generated through cigarette excise tax rate increase. A cautionary note with respect to cigarette excise tax increase is that, rates more than 60 percent are not advisable as they will results in smuggling and thus loss of government revenue.