The Distributional Impact of Tobacco Excise Increases*(1)

CP VAN WALBEEK*(2)
It is generally recognised that, of all tobacco control instruments available, rapidly increasing excise taxes are by far the most
effective in reducing cigarette consumption (World Bank, 1999; Jha and Chaloupka, 2000). Despite its addictiveness, the price
elasticity of cigarette demand is estimated at around -0.4 for most developed countries and between -0.4 and -0.8 for developing
countries (Chaloupka and Warner, 1999; Jha and Chaloupka, 2000). South Africa's cigarette price elasticity is estimated to lie in the
developing country range (Reekie, 1994; Van Walbeek, 1996 and 2000 a; and Van der Merwe and Annett, 1998).
2002 SAJE v70(3) p561
Between 1990 and 2000 aggregate cigarette consumption in South Africa decreased by approximately 30 per cent, based on excise
revenue data*(3). During this period the average nominal price of a pack of cigarettes increased from R1.65 to R8.00, an average
increase of 17 per cent per year. In real terms the retail price of cigarettes doubled over this period. This was caused primarily by a
225 per cent increase in the real excise rate*(4). However, the cigarette manufacturing industry contributed to the real retail price
increase by passing much more than the real excise tax increase onto the consumer. The industry apparently followed this pricing
strategy to defend its profitability in a period of decreasing sales volumes (Van Walbeek, 2000 b).
From a tobacco control perspective, a rapidly increasing excise tax is beneficial because it reduces tobacco consumption. Due to
the relatively inelastic demand for cigarettes, increasing excise taxes benefit the treasury, because it increases government revenue
(World
2002 SAJE v70(3) p562
Bank, 1999; Van Walbeek, 2000 a). However, some economists have expressed reservations about using tax increases as a tobacco
control mechanism, because cigarette taxes are believed to have a disproportionately detrimental impact on the poor (see Jha and
Chaloupka, 2000). The argument runs as follows: (1) in most countries, smoking prevalence is higher among lower socio-economic
groups, and (2) poorer smokers tend to spend a greater proportion of their income on tobacco than richer smokers. If these
hypotheses were true, it would follow that cigarette taxes are regressive. Given that regressive taxes are undesirable from a social
equity perspective, such a finding could be used as an economic argument against increasing these taxes further.
While agreeing that tobacco taxes are regressive, tobacco control economists are of the opinion that the government should not
reduce the excise tax (World Bank, 1999:74). In fact, they argue that increases in the excise tax are likely to reduce the excise tax's
regressiveness. This is based on the premise that the poor are more sensitive to price changes, and would thus reduce their
cigarette consumption by a greater percentage than the rich in response to a tax-induced increase in tobacco prices. As a result, the
relative tax burden on the poor, vis-à-vis the rich, would decrease as the excise tax is increased.
This paper aims to investigate the distributional impact of cigarette taxation. In particular, three interrelated aspects will be explored:
(1) the relative importance of cigarettes in households' expenditure patterns, (2) changes in the regressiveness of cigarette taxes
between 1990 and 1995, and (3) the likely impact of changes in the real retail price of cigarettes on the regressiveness of the tax.
2002 SAJE v70(3) p563

1. Data Used
An analysis aimed at investigating the consumption patterns of different income groups requires a cross-section approach. In
South Africa a number of household survey data sets exist*(5). Any one of these surveys therefore cannot be used to investigate
households' reaction to price changes, because the price of cigarettes in any survey is the same for everyone. In many other
countries cigarette prices differ because of quality differences and/or the imposition of variable tax rates on imported cigarettes. In
South Africa, however, the price variation between brands is remarkably low. Furthermore, since respondents were asked the total
amount they spend on cigarettes - not the price they paid per pack - it is impossible to determine the impact of differences in
cigarette prices on people's consumption patterns from only one survey.
At least two comparable survey data sets taken at different periods, are required, so that one can track the impact of changes in
cigarette prices over time. Two data sets fulfil these criteria: the Income and Expenditure surveys of 1990 and 1995, respectively,
and the 1993 SALDRU (Southern African Labour and Development Research Unit) survey, in conjunction with the 1998 KIDS
(KwaZulu-Natal Income Dynamics Survey). The latter forms a panel, in that the same households are tracked over time. However, it
is limited to one province only (KwaZulu-Natal). This paper is based on results derived from the
2002 SAJE v70(3) p564
former: the Income and Expenditure surveys*(6).

258
The 1990 survey was based on 14 341 households, whereas the 1995 survey was based on 29 600 households. The 1990 survey
was performed in the 12 main urban areas of South Africa*(7), while the 1995 data were based on the whole country (including the
formerly independent TBVC states). In order to make the data comparable, the 1995 data were adjusted to exclude respondents from
rural areas. With approximately 12 700 observations excluded, the study was done with the remaining 16 903 observations in the
survey*(8). The surveys were performed in October of the respective years.
The Income and Expenditure surveys are focused primarily on individual households' expenditure patterns. Expenditure on tobacco
is subdivided into four components: (1) cigarettes, (2) cigars, (3) pipe and other tobacco, and (4) smoking requisites. Given that the
combined expenditure on categories (2), (3) and (4) comprises less than 6 per cent of total tobacco expenditures, these three
categories were excluded from the analysis.
2002 SAJE v70(3) p565

2. Smoking Households and Cigarette Expenditure Patterns, 1990 and 1995

The data in the Income and Expenditure surveys refers to household expenditure, rather than individual expenditure. It is important
to note that the percentage of smoking households, relative to all households, should not be equated to the smoking prevalence
percentage. The latter is defined as the percentage of the (adult) population that smoke. A smoking household is defined as a
household that spends money on cigarettes. Since not every person in a smoking household is a smoker, it follows that the
percentage of smoking households will exceed the smoking prevalence percentage.
The first step was to subdivide the data into four income quartiles, for both 1990 and 1995. Each income quartile includes
approximately 25 per cent of households. The results are shown in Table 1. The table highlights the well-known facts about income
dis tribution in South Africa, i.e. that it is highly unequal and largely split down racial lines. This paper will not focus on income
differences between the different races per se.
Of more concern for this paper is the change in real household income between 1990 and 1995, and its impact on cigarette
consumption. Using Consumer Price Index data, the 1990 income data were inflated to 1995 prices. The growth in real average and
median income for the different income quartiles is shown in the last two rows of Table 1 . Average real household income has
decreased by nearly 6 per cent between 1990 and 1995. This figure seems plausible, given a 6.7 per cent decrease in real per capita
GDP and a 4.0 per cent decrease in real per capita personal disposable income over the same period (SARB, 1998: S -143).
2002 SAJE v70(3) p566
Table 1. Number of Observations in Each Income Quartile

Q1 Q2 Q3 Q4 Total
1990*(9)
Africans 3039 2586 1418 292 7335
Coloureds 208 341 418 158 1125
Indians 121 237 438 233 1029
Whites 220 426 1304 2902 4852
Total 3588 3590 3578 3585 14341
Percentage of total households 25.02 25.03 24.95 25.00 100.00
Median income (1990 prices) 5760 12324 25800 63600 17796
Mean income (1990 prices) 5532 12725 26798 81429 31611
Median income (1995 prices)*(10) 9594 20526 42972 105930 29640
Mean income (1995 prices)*(11) 9214 21194 44634 135626 52650
1995*(12)

Africans 3045 2541 1832 915 8333

Coloureds 831 880 809 408 2928
Indians 60 160 349 396 965

259
Whites 290 649 1235 2503 4677
Total 4226 4230 4225 4222 16903
Percentage of total households 25.00 25.03 24.99 24.98 100.00
Median income (1995 prices) 8174 19200 41474 98824 28224
Mean income (1995 prices) 8014 19614 42544 128080 49538
Percentage change in real median income -14.8 -6.5 -3.5 -6.7 -4.8
(1990-1995)
Percentage change in real mean income -13.0 -7.5 -4.7 -5.6 -5.9
(1990-1995)

Note: 1990 data were annualised, but source data and data used in subsequent regressions are based on monthly data. The 1995
data were in annual format in the source document.
While cigarette smoking may be more prevalent among lower socio-economic groups in developed countries (Townsend, 1987 and
Townsend, et al., 1994), this does not appear to be the case in South Africa. From Table 2 it is
2002 SAJE v70(3) p567
evident that cigarette smoking is least prevalent in the poorest households (quartile Q1). Thirty-eight per cent of the poorest
households spent money on cigarettes in 1990, compared to approximately 50 per cent of households in the other three income
quartiles.
Between 1990 and 1995 there has been a decrease in the percentage of smoking households. There is some evidence to suggest
that the percentage of smoking households among the poorer half of the population is decreasing faster than among the richer half:
the proportion of smoking households among the lowest two quartiles has decreased by 5 percentage points, and that of the upper
two quartiles by 4 and 2 percentage points, respectively.
Table 2. Percentage of Households Spending Money on Cigarettes, 1990 and 1995

Q1 Q2

1990 1995 Change 1990 1995 Change

Africans 38 32 -6 49 44 -5
Coloureds 54 42 -12 72 63 -9
Indians 50 37 -13 60 56 -4
Whites 28 21 -7 36 33 -3
All groups 38 33 -5 51 46 -5

Q3 Q4 Total

1990 1995 Change 1990 1995 Change 1990 1995 Chang

e
Africans 50 42 -8 47 39 -8 44 38 -6
Colureds 70 64 -6 63 56 -7 66 56 -10
Indians 62 48 -14 58 44 -14 59 47 -12
Whites 46 46 0 47 48 +1 45 44 -1
All groups 52 48 -4 48 46 -2 47 43 -4

Even though smoking prevalence is lowest in the poorest income quartile, tobacco generally comprises a larger percentage of the
household's total income than among the richer households. In Table 3 the percentage of households that spend more than a
certain (arbitrarily chosen) threshold percentage of their total income on cigarettes is shown. Thus, in 1990, 18 per cent of

260
 2002 SAJE v70(3) p568
households in the poorest income quartile spent more than 5 per cent of their total income on cigarettes, and 8 per cent spent more
than 10 per cent of their income on cigarettes. Given the low incomes, the opportunity cost of these cigarette expenditures is
especially stark.
The percentage of households that exceed the threshold percentage decreases rapidly as income levels increase. In fact, the
percentage of households spending more than 5 per cent of their income on cigarettes becomes negligibly small for the highest
income quartile.
A positive aspect, from a tobacco control perspective, is the fact that the percentage of households spending a significant portion
of their income on cigarettes seems to have decreased between 1990 and 1995. So, for example, the percentage of the poorest
households spending more than 5 per cent of their income on cigarettes has decreased from 18 per cent in 1990 to 13 per cent in
1995. This decrease in the relative importance of cigarettes in households' expenditure patterns is consistent across all races.
Table 3. Percentage of Households spending more than a Certain Percentage of their Total Income on Cigarettes, by
Income Quartile

Q1 Q2 Q3 Q4

> 5% >10% > 5% >10% > 5% > 0% > 5% >10%

1990
Africans 18 7 11 3 5 2 1 0
Coloureds 26 8 20 3 6 1 1 1
Indians 25 8 14 1 3 1 0 0
Whites 17 11 14 5 6 1 1 0
Total 18 8 12 3 5 1 1 0

1995

Africans 13 4 7 1 1 0 0 0
Coloureds 16 6 12 2 6 1 3 1
Indians 18 2 14 0 1 0 1 0
Whites 11 4 15 3 7 0 1 0
Total 13 4 10 2 4 0 1 0

3. The Regressiveness of the Excise Tax

Tables 2 and 3 suggest that the poor, while they smoke less,
2002 SAJE v70(3) p569
spend proportionally more on cigarettes than the rich. Given that the excise tax amount paid is approximately proportional to
cigarette expenditure, it follows that the tax is likely to be regressive. One can investigate the incidence of the excise tax directly by
calculating the excise tax amount, as a percentage of household income, for each income quartile. This percentage was calculated
for smoking households only*(13).
The results of this analysis are shown in Table 4. It is quite clear that cigarette excise taxes are regressive. In 1990 low-income (Q1)
smoking households spent 1.55 per cent of their income on excise taxes, compared to 0.84 per cent in the second quartile (Q2), 0.56
per cent in the third quartile (Q3) and only 0.29 per cent in the high-income quartile (Q4). A similar pattern can be seen for each of
the race groups.
Table 4. Average Percentage of Household Income spent on Cigarette Excise Taxes, for Smoking Households

Q1 Q2 Q3 Q4

1990 1995 1990 1995 1990 1995 1990 1995

261
African 1.55 1.37 0.80 0.76 0.57 0.41 0.26 0.21
Coloured 1.32 1.40 0.90 0.83 0.54 0.56 0.32 0.39
Indian 1.21 1.31 0.80 0.83 0.46 0.54 0.21 0.26
White 2.24 1.70 1.12 1.29 0.62 0.75 0.30 0.36
Total 1.55 1.39 0.84 0.84 0.56 0.56 0.29 0.33

Between October 1990 and October 1995 the real excise tax increased by 34 per cent, while the real retail price of cigarettes
increased by 29 per cent. According to tobacco control economists this increase in the real retail price
2002 SAJE v70(3) p570
should reduce the regressiveness of the tax, because low-income households are expected to decrease their consumption by a
greater percentage than high-income households (World Bank, 1999:74 ; Jha and Chaloupka, 2000:258-259). Tax-induced price
increases cause a behavioural response, which reduces the regressiveness of the tax. Considering Table 4, there is some evidence
to support this hypothesis. In 1995 the excise tax burden was lower than in 1990 for low-income households, while it was marginally
higher for high-income households. Between 1990 and 1995 the excise tax burden did not change for middle-income smoking
households.
In Table 5 the percentage of household income expended on excise taxes for each income quartile is expressed as a percentage of
the average excise share of all smoking households*(14). This index enables one to measure the relative burden of the excise tax
(and thus its regressiveness), and to see how this has changed over time. Considering the total figures first, it is clear that the
regressiveness of the tax has decreased between 1990 and 1995. The tax burden on the poorest quartile has decreased from an
index value of 201 in 1990 (i.e. more than double the population average) to an index value of 190 in 1995. At
2002 SAJE v70(3) p571
the same time, the burden of the excise tax on the richest quartile has increased from 38 per cent of the population average in 1990
to 45 per cent of the population average in 1995. For middle-income smoking households, the tax burden has increased marginally
between 1990 and 1995. Thus, even though the excise tax is still regressive in absolute terms, it has become relatively less
regressive as a result of the increase in cigarette prices and taxes.
Table 5. Relative Incidence of Cigarette Excise Taxes among Smoking Households

Q1 Q2 Q3 Q4

1990 1995 1990 1995 1990 1995 1990 1995

African 202 187 104 104 74 56 34 29
Coloured 171 192 117 113 70 77 42 54
Indian 157 179 104 113 60 74 27 35
White 292 232 145 176 80 102 40 49
Total 201 190 109 115 73 76 38 45

4. Price Elasticity by Income Group

Studies investigating the demand for cigarettes generally find that the quantity demanded is determined primarily by the real price
of cigarettes (Chaloupka and Warner, 1999; World Bank, 1999). South African econometric studies furthermore indicate that real
income has a significant positive effect on the demand for cigarettes (Van der Merwe and Annett, 1998 ; Van Walbeek, 2000 a).
A limited number of studies have investigated the relationship between price elasticity and income/socio-economic group (see
Townsend, 1987; Townsend, et al, 1994; Sayginsoy, et al, 2000). Townsend's studies on the impact of cigarette prices, income and
health publicity on different socio-economic groups' smoking patterns were based on a comparison between different cross-section
surveys over time. Sayginsoy and colleagues used a
2002 SAJE v70(3) p572
multiple regression model to estimate the price elasticities of the different income groups. The approach followed in this study
broadly follows Townsend's, rather than Sayginsoy's approach.

262
The study assumes that cigarette demand is determined primarily by the real price of cigarettes and real income. In order to derive
price and income elasticities for the various income groups, the following approach is applied:
(i) Estimate the income elasticity for each income quartile, for both 1990 and 1995.
(ii) Determine the percentage change in average real income between 1990 and 1995, for each income
quartile.
(iii) Using the appropriate income elasticity, determine by what percentage cigarette consumption would
have changed due to changes in income.
(iv) Determine the percentage change in cigarette consumption for each income quartile.
(v) Take account of the income effect by subtracting the value obtained in (3) from the value obtained
in (4), for each income quartile.
(vi) Estimate the price elasticity as the percentage change in the adjusted consumption (obtained in
(5)), divided by the percentage change in the real price of cigarettes, for each income quartile.
The first step is the most complex. Based on the fact that the regressiveness of a tax is expressed as the burden of the tax in relation
to income, the following basic mathematical form was chosen:
ln(Cig.Ex/Income) = α + β ln(Income) + Σ αi + Σ βi ln(Income)i, (1)
2002 SAJE v70(3) p573
where Cig.Ex is the household's total annual expenditure on cigarettes and Income is household
income *(15). The subscripted parameters αi and βi (i = 1, 2, 3) refer to intercept dummies and slope dummies
of the first three income quartiles, respectively. The fourth quartile was chosen as the base quartile.
Households that did not spend money on cigarettes were excluded from the data set. The results are
shown in Table 6 .
Table 6. Regression Results
Dependent variable: ln(Cig.Ex/Income)

1990 data 1995 data

Variable Coefficient t- Prob- Coefficient t- Prob-
statistic value statistic value
Constant 7.938 19.33 0.000 8.793 19.67 0.000
Ln(Income) -0.925 -19.45 0.000 -0.763 -19.81 0.000
Dummy (Q1 = 1) -1.921 -3.58 0.000 -3.054 -4.93 0.000
Dummy (Q2 = 1) -3.290 -4.14 0.000 -1.992 -2.13 0.033
Dummy (Q3 = 1) -2.671 -3.59 0.000 -3.385 -3.50 0.000
Slope dummy (Q1) 0.192 2.62 0.009 0.279 4.55 0.000
Slope dummy (Q2) 0.408 3.75 0.000 0.168 1.83 0.067
Slope dummy (Q3) 0.324 3.46 0.001 0.306 3.42 0.001
Number of observations 6788 7339
R2 value 0.352 0.331
Adjusted R2 value 0.351 0.330
Implied income elasticity:
Q1 0.27 0.52
Q2 0.48 0.41
Q3 0.40 0.54
Q4 0.08 0.24

263
 2002 SAJE v70(3) p574
Other than the Q2 slope dummy variable in 1995, all coefficients are highly significant. The negative coefficient on the income
variable implies that the relative importance of cigarette expenditure decreases as people's household income increases. This result
is expected. The coefficients on the slope dummy variables indicate by how much the implied income elasticity varies from that of
the base solution, i.e. the fourth income quartile. Using this mathematical specification, the income elasticity for the highest income
quartile is estimated at 0.08 in 1990 and 0.24 in 1995 *(16). The income elasticities for the other three income quartiles are
significantly higher, averaging around 0.4 in 1990 and 0.5 in 1995.
Once estimates for the income elasticities have been obtained, price elasticities can be estimated relatively easily. The results are
shown in Table 7. The average income change (row (1)) was derived in Table 1. Row (2) was derived as the percentage change in
average cigarette consumption. The latter is calculated as average annual expenditure on cigarettes by smoking households,
divided by the average retail price in the appropriate year*(17). Using the average of the quartile-specific income elasticities derived
in Table 6, one can determine the percentage change in cigarette consumption, ascribed to the average income change of each
income quartile (row (3)). The net change in cigarette consumption (i.e. with the income
2002 SAJE v70(3) p575
effect removed) is calculated as row (2) less row (3). Row (5) is calculated as the percentage difference in the real price between
October 1990 and October 1995. Finally, the price elasticity is estimated as the net change in cigarette consumption, divided by the
real price change.
Table 7. Estimating the Price Elasticity of Demand for Cigarettes by Income Quartile
Q1 Q2 Q3 Q4
(1) Average income change [Table1] -13.0 -7.5 -4.7 -5.6
(2) Percentage change in average cigarette consumption -45.5 -36.1 -33.5 -24.5
(3) Effect of income change on consumption -5.1 -3.3 -2.2 -0.9
[(1) x (average elasticity calculated in Table 6)]
(4) Net change in cigarette consumption [(2)-(3)] -40.4 -32.8 -31.3 -23.6
(5) Real price change 29.0 29.0 29.0 29.0
(6) Estimated price elasticity [(4)/(5)] -1.39 -1.13 -1.08 -0.81

Regarding the magnitudes of the elasticities, these seem rather high. Econometric studies, based on South African time-series data,
generally estimate the average price elasticity at between -0.5 and -0.8 for this period (Reekie, 1994; Van der Merwe and Annett,
1998; Van Walbeek, 1996 and 2000 a). This discrepancy can be ascribed to the rather more severe decrease in tobacco consumption
implied by these data vis-à-vis aggregate data, and to the fact that the change in tobacco consumption is ascribed fully to the
change in cigarette prices. According to the Income and Expenditure surveys data, cigarette consumption per household decreased
by approximately 31 per cent between 1990 and 1995. However, time-series data, based on excise tax revenue, suggests that per
capita consumption decreased by only 18 per cent over the same period. This suggests that these price elasticities are upper
bounds.
The more severe than expected decrease in cigarette consumption could possibly be explained by a systematic underreporting in
1995. Given that people were asked to
2002 SAJE v70(3) p576
note their total expenditure on cigarettes, rather than their daily consumption and the price they paid per pack, it is quite
conceivable that they got the internal calculations wrong and underreported their expenditure. The sharp increases in cigarette
prices in 1995 may not have been fully internalised by all respondents. Other than this subconscious underreporting, some people
may have consciously underreported their cigarette consumption. Given the emerging social stigma and forceful press coverage
about the detrimental effects of smoking in 1994 and 1995, some people may have felt embarrassed about their habit, and would
therefore want to underreport their consumption. Also, because the early 1990 s were years of deep recession, some people may
have felt uneasy to report their full cigarette expenditure, because the opportunity cost of such expenditure may be perceived as
being more visible than in an economic boom period.
However, on the assumption that the decrease in cigarette consumption is exaggerated equally among the income groups, the
results in Table 7 nevertheless indicate that price elasticity is inversely correlated with income. This is in line with expectations, and
thus explains why the regressiveness of the cigarette excise tax has decreased between 1990 and 1995.

264
5. Conclusion
The aim of this paper was to investigate the distributional impact of excise taxes on consumers of cigarettes. Based on the 1990 and
1995 Income and Expenditure surveys it was found that, in contrast to developed countries, a smaller percentage of low-income
households, vis-à-vis more affluent households, buy cigarettes. Nevertheless, a greater percentage of low-income households
spend a significant proportion of their household income on
2002 SAJE v70(3) p577
cigarettes than more affluent households. As is to be expected, cigarette excise taxes are regressive. In fact, in 1990 the relative
share of cigarette excise taxes of the average smoking household's income of the poorest income quartile was more than five times
that of the average smoking household's income in the richest quartile.
Between 1990 and 1995 the relative importance of cigarettes in households' expenditure patterns has decreased, mainly among the
poorer households. As a result, the regressiveness of the tax has decreased. In 1995 the incidence of the tax was 4.2 times heavier
on the poorest income quartile, vis-à-vis the richest quartile, compared to a multiple of more than 5 in 1990.
On the assumption that the demand for cigarettes is determined only by income and price, income-specific price elasticities were
estimated. The price elasticity was found to be inversely correlated with income. This means that poorer people adjust their
cigarette consumption by a greater percentage in reaction to a price change than richer people.
While this paper did not investigate all of the distributional aspects of increasing excise taxes*(18), the results show that cigarette
price increases in South Africa certainly did not fall disproportionately heavily on the poor during this period. Whether this result
is unique to this period and data set, or whether it is generally true, would have to be investigated as more data becomes available.
However, as it currently stands, the results of this paper clearly indicate that rapidly increasing excise taxes (1)
2002 SAJE v70(3) p578
reduces consumption, and (2) does not have a detrimental distributional impact. The implication of these results is that the
government's policy of rapidly increasing excise taxes has had beneficial tobacco control consequences, and did not result in
socially undesirable side effects.

6. References
Chaloupka, FJ and Warner, KE, 1999. The economics of smoking, Working Paper 7047, National Bureau of Economic Research,
Cambridge, MA: NBER.
Economics of Tobacco Control in South Africa Project (ETCSA), 1998. The Economics of Tobacco Control in South Africa, report
submitted to the International Tobacco Initiative, ETCSA, School of Economics, University of Cape Town.
Jha, P and FJ Chaloupka (eds.) 2000. Tobacco Control in Developing Countries. New York: OUP: published by Oxford University
Press on behalf of The World Health Organisation and The World Bank.
Reekie, WD, 1994. "Consumers' surplus and the demand for cigarettes". Managerial and Decision Economics, 15: 223-234
Sayginsoy, O, Yurekli, AA and De Beyer, JA, 2000. "An economic analysis of poverty and demand for cigarettes in Bulgaria".
Mimeo.
South African Reserve Bank, 1998. Quarterly Bulletin.
Townsend, J, 1987. "Cigarette tax, economic welfare and social class patterns of smoking", Applied Economics, 19: 355-65.
Townsend, J, Roderick, P and Cooper, J, 1994. "Cigarette smoking by socioeconomic group, sex, and age: effects of price, income
and health publicity", British Medical Journal, 309: 923-7.
Van der Merwe, R and Annett, N, 1998. "Chapter 4: The effects of taxation on consumption in South Africa", in ETCSA, The
Economics of Tobacco Control in South Africa, report submitted to the International Tobacco Initiative, School of Economics,
University of Cape Town.
Van Walbeek, CP, 1996. "Excise taxes on tobacco: how much scope does the government have?", 1996 SAJE v64(1) p20-42.
Van Walbeek, CP, 2000a. Impact of the recent tobacco excise tax increases on the future government revenue potential in South
Africa. Economics of Tobacco Control Project, UCT, Research Release no. 1.
Van Walbeek, CP, 2000b. Industry responses to the recent tobacco excise tax increases in South Africa. Economics of Tobacco
Control Project, UCT, Research Release no. 2.
Van Walbeek, CP, 2001. Recent trends in smoking prevalence in South Africa: Some evidence from AMPS data. Economics of
Tobacco Control Project, UCT, Research Release no. 3.
World Bank, 1999. Curbing the Epidemic: Governments and the Economics of Tobacco Control. The World Bank: Washington,
D.C.

265
 Endnotes
1 (Popup - Popup)
This paper was originally presented at the International Jubilee Conference of the Economic Society of South Africa, held 13 and 14
September 2001 at Glenburn Lodge, Johannesburg. The author is grateful to an anonymous referee for helpful comments on an
earlier draft of the paper. The financial assistance of Research in International Tobacco Control (RITC), a secretariat housed at the
International Development Research Centre in Ottawa, Canada, is gratefully acknowledged. This paper benefited much from the
inputs of Kalie Pauw, Iraj Abedian, Murray Leibbrandt, Joy de Beyer, Montasser Kamal, Stanley du Plessis, Conrad Barberton,
Tania Ajam and Nick Wilkins. They are not responsible for any remaining errors.
2 (Popup - Popup)
Senior Researcher, Applied Fiscal Research Centre, and Lecturer, School of Economics, University of Cape Town.
3 (Popup - Popup)
Of course, if there had been a significant increase in cigarette smuggling, the decrease in consumption would be overstated. The
industry position is that rapidly increasing excise taxes cause an increase in smuggling. On the other hand, tobacco control groups
argue that the smuggling is facilitated by the tobacco companies themselves, either overtly or covertly.
The fact that South Africa is geographically relatively isolated, that other commodities - especially drugs - are more lucrative to
smuggle, and that cigarette smuggling has not received much, if any, attention in the media, suggests that cigarette smuggling is
not a major problem in South Africa. Also, given the very large increases in the real price, a decrease of 30 per cent in cigarette
consumption since 1990 does not seem unreasonable.
4 (Popup - Popup)
In nominal terms, cigarette excise taxes increased from R0.33 per pack in 1990 to more than R2.50 per pack in 2000. Excise taxes as a
percentage of the retail price increased from 20 per cent in 1990 to 32 per cent in 2000.
5 (Popup - Popup)
Some of the major cross-section data sets include the following: the University of Cape Town's 1993 SALDRU survey, the
University of Natal's 1998 KwaZulu-Natal Income Dynamics Survey, Statistics South Africa's 1990 and 1995 Income and
Expenditure Surveys, and the annual All Media and Product Survey (AMPS) performed by AC Nielsen.
6 (Popup - Popup)
Unfortunately the AMPS database could not be used, since it simply investigates whether people smoke or not; it does not
investigate how much they spend on cigarettes.
7 (Popup - Popup)
These were the (1) Cape Peninsula, (2) Port-Elizabeth-Uitenhage, (3) East London, (4) Kimberley, (5) Bloemfontein, (6) Free State
Goldfields (Welkom-Virginia-Odendaalsrus), (7) Durban-Pinetown, (8) Pietermaritzburg, (9) Pretoria-Centurion-Akasia, (10)
Witwatersrand, (11) Vaal Triangle (Vereeniging-Van der Bijl Park-Sasolburg) and (12) Klerksdorp-Stilfontein-Orkney.
8 (Popup - Popup)
In the "Description of settlement" field, all observations with a field number of 30 or more were excluded. These represent rural
areas. The results in this paper thus limited to the 12 main urban areas. A closer matching of areas was not possible.
9 (Popup - Popup)
The annualised quartile splits for 1990 are at R8880, R17760, and R40092, respectively (in current prices)
10 (Popup - Popup)
Based on the CPI (metropolitan areas; all goods and services): Oct. 1995 = 101.1, Oct. 1990 = 60.7.
11 (Popup - Popup)
Based on the CPI (metropolitan areas; all goods and services): Oct. 1995 = 101.1, Oct. 1990 = 60.7.
12 (Popup - Popup)
The quartile splits for 1995 are at R13130, R28264, and R61310 respectively (in current prices).
13 (Popup - Popup)
The results are qualitatively the same whether one considers the expenditure patterns of the whole population or only smoking
households in the denominator. The results for the whole population can be obtained from the author.
14 (Popup - Popup)
In 1995 the average smoking household spent 0.731 per cent of its household income on cigarette excise taxes, compared to 0.768
per cent in 1990. In 1990 excise taxes comprised 21.4 per cent of the average retail price of cigarettes; by 1995 this percentage

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increased to 24.2 per cent.
The figures presented in Table 5 are obtained by dividing the appropriate tax burden figures in Table 4 by the average for all
smoking households. As an example, in 1990 smoking households in the poorest quartile spent 1.55 per cent of their income on
excise taxes, compared to the average of smoking households (across all income quartiles) of 0.768 per cent. The index value of 201
is obtained by dividing 1.55 by 0.768.
15 (Popup - Popup)
Other basic functional forms that were considered were
Cig.Ex = α + β Income,
ln(Cig.Ex) = α + β ln(Income), and
Cig.Ex/Income = α + β Income.
Based on goodness of fit measures, these specifications were vastly inferior to the specification that was chosen.
16 (Popup - Popup)
The coefficient on the independent variable in a loglinear specification can be interpreted as an elasticity. If the regression equation
is specified as equation (1), this can be rewritten as ln(Cig.Ex) - ln(Income) = α + β ln(Income), from which follows ln(Cig.Ex) = α +
(β+1) ln(Income). The implied income elasticity of demand in the original equation is thus (β+1).
17 (Popup - Popup)
The average retail price of cigarettes in 1990 was R1.65, and it was R3.48 in 1995. The average retail prices in October of the
respective years, was R1.69 and R3.63, respectively.
18 (Popup - Popup)
Specifically, this paper did not attempt to investigate the long-term healthcare cost implications of reduced cigarette consumption.
Also, the paper did not speculate on the short-term fiscal impact of the increased excise revenue, and how it may benefit the poor.

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