Problem Statement According to the World Health Organization (2019), around 7.1 million people die from cigarettes worldwide annually, and among them, 900,000 people died from cigarettes smoke. Cigarettes with thousands of toxins have caused about 25 different diseases such as cancer, cardiovascular disease, respiratory disease, as well as affected reproductive health. According to the World Cancer Research Fund (2020), 85% of lung cancer cases are caused by smoking and smelling cigarettes smoke. Smoking is not only harmful to the health of smokers and those around them, but also causes great losses to the economy and society. To produce cigarettes, farmers have to spend a part of their production land to grow cigarettes ingredients. Cigarette smoking also pollutes the air, and the smoke released into the environment makes people around you sick by inhaling second-hand smokers. Cigarettes waste also adversely affects the living environment. Cigarettes is the leading cause of environmental pollution and long-term consequences. Therefore, cigarette is the cause of increasing costs of environmental protection services, overcoming air pollution and living environment. According to the World Health Organization (2020), cigarettes usage is also one of the causes of poverty, affecting the country’s sustainable development. In Vietnam, as stated in Ministry of Health’s annual report in 2020, annually, about 40,000 people die from cigarette-related diseases and 33 million non-smokers are affected by cigarettes smoke. Although the rates of smoking and secondhand smoking in Vietnam have decreased, the number of cigarette users in Vietnam is still in the list of top 15 countries with the number of cigarette users in the world. This report also stated that the rate of illness and premature death due to cigarettes use accounted for 12% of the total disease burden. Moreover, cigarettes use is also one of the causes of poverty, affecting the country’s sustainable development. The report shows that currently in Vietnam, the total cost of treatment and loss of work capacity due to illness and premature death due to cigarettes causes 5 groups of diseases (i.e., lung cancer, upper respiratory cancer, lung disease, myocardial infarction, stroke) is more than 23,000 billion VND per annum. Meanwhile, the survey conducted by Institute of Medical Genetics of Vietnam (2020) shows that each year more than 30,000 billion VND were “burned” to buy cigarettes. Recently, cigarette is a product to limit consumption because it causes a great harm to human health. In the world today, many Asian countries levy excise flat-rate duties on cigarette with a particularly high flat-rate duties rate in order to control consumption of this harmful product. Nguyen (2018) stated that income per person in Vietnam is increasing faster than that of cigarette prices so cigarettes are getting more affordable. Low cigarette prices are believed to lead to a high percentage of smokers in Vietnam, and as such Vietnam is in the process of considering the form of increasing the excise flat-rate duties on cigarettes. Given the above situation, this thesis, namely “Analyzing the impact of flat-rate duties on the cigarette consumption, government budget and cigarette smuggling in Asian countries in 2020”, was conducted. From observing the relationship between changes in flat-rate duties among Asian countries, the author would like to point out the impact of flat-rate duties on the cigarette consumption, government budget and cigarette smuggling in these countries. In addition, the thesis recommends the solutions for Vietnam government to cut down on the number of smokers and overcome remained consequences. 1.2 Objectives of study The general objective of the thesis is to determine the impact of flat-rate duties on the cigarette consumption, government budget and cigarette smuggling in Asian countries in 2020, and then propose the solutions for Vietnam government to cut down on the number of smokers and overcomes remained consequences. The specific objectives include: i. Figure out the impact of flat-rate duties on the cigarette consumption, government budget and cigarette smuggling in Asian countries. ii. Recommend the solutions for the Government of Vietnam to decrease the number of smokers and overcome remained consequences. 1.3 Research questions To obtain these two aforementioned specific research objectives, this thesis focuses on answering the following questions: 1) What is the impact of flat-rate duties on the cigarette consumption, government budget and cigarette smuggling in Asian countries? 2) What is the impact of flat-rate duties on government budget in Asian countries? 3) What is the impact of flat-rate duties on the cigarette smuggling in Asian countries? 1.4. Scope of the research The research is focus on analyzing the impact of flat-rate duties on the cigarette consumption, government budget and cigarette smuggling in Asian countries. According to WHO (2021), Some other countries in Asia, such as the Philippines, Cambodia, Laos, Malaysia and Thailand, have alarmingly high male smoking rates of over 40%. In Asian countries, more than 7 million people die each year from tobacco-related diseases, of which 600,000 die from passive exposure to tobacco smoke. Seven million deaths are a huge amount, but that number continues to rise. Every tobacco death is a preventable tragedy. Those deaths, and the suffering caused by tobacco-related diseases, have far-reaching effects on the health of individuals and their families, on the well-being of communities, and on the development of Countries. Efforts to promote ratification of the World Health Organization Framework Convention on Tobacco Control are facing obstacles in Southeast Asia. It is one of the regions with the highest number of smokers in the world, one of the reason is that in Asian countries, cigarette smuggling happens frequently. Hence, the data sets are cross-sectional, which were collected in 2020 for 48 Asian countries. 1.5. Structure of thesis The research consists of five chapters as followings: Chapter 1 explains reason the topic of thesis is chosen, significance of the thesis, main objectives, some major research questions and the scope of the research. Chapter 2 provides an overview on theoretical background of the impact of flat-rate duties on the cigarette consumption, government budget and cigarette smuggling. Chapter 3 highlights the research methodology. This chapter also describes the general econometrics model, variables and data and outlines the way to analyze data. Chapter 4 shows the statistical results from adopted models. Findings are analyzed and to make clear in reaching objectives and answering the questions in Chapter 1. Results of empirical studies by other researchers are also used to strongly support our findings. Chapter 5 resumes main findings and recommends useful policies for Vietnam in strategy of decreasing the number of smokers and overcoming remained consequences. This chapter also identifies the limitation and implications for further study.
INTRODUCTION
Problem Statement
The World Health Organization (2019) reports that approximately 7.1 million people die each year due to cigarette use, with 900,000 of those deaths attributed specifically to secondhand smoke The presence of thousands of toxins in cigarettes significantly contributes to this alarming statistic.
25 different diseases such as cancer, cardiovascular disease, respiratory disease, as well as affected reproductive health According to the World Cancer Research Fund
In 2020, it was reported that 85% of lung cancer cases are linked to smoking and exposure to cigarette smoke Smoking poses significant health risks not only to smokers but also to those around them, leading to substantial economic and societal losses The cultivation of tobacco requires farmers to allocate valuable land resources, while cigarette smoke contributes to air pollution and endangers the health of non-smokers through second-hand exposure Additionally, cigarette waste severely impacts the environment, making it a primary contributor to pollution and its long-term effects Consequently, the costs associated with environmental protection and air quality improvement are rising The World Health Organization (2020) also highlights that cigarette use is a factor in poverty, hindering sustainable development in nations.
In Vietnam, the Ministry of Health's 2020 report reveals that approximately 40,000 individuals die annually from cigarette-related diseases, with 33 million non-smokers affected by secondhand smoke Despite a decline in smoking rates, Vietnam remains among the top 15 countries for cigarette users The report highlights that smoking accounts for 12% of the total disease burden, contributing to poverty and hindering sustainable development The financial impact of treatment and loss of productivity due to smoking-related illnesses, including lung cancer and heart disease, exceeds 23 trillion VND each year, while over 30 trillion VND is spent annually on cigarette purchases.
Cigarette consumption is increasingly restricted due to its significant health risks Many Asian countries impose high excise flat-rate duties on cigarettes to curb their use According to Nguyen (2018), the rising income per capita in Vietnam is outpacing cigarette price increases, making them more affordable This affordability is linked to a higher smoking prevalence in Vietnam, prompting the government to consider raising excise duties on cigarettes to address this public health concern.
This thesis, titled “Analyzing the Impact of Flat-Rate Duties on Cigarette Consumption, Government Budget, and Cigarette Smuggling in Asian Countries in 2020,” examines the relationship between changes in flat-rate duties and their effects on cigarette consumption, government revenue, and smuggling activities across Asian nations The study highlights the significant influence of these duties on smoking rates and offers recommendations for the Vietnamese government to reduce the number of smokers and address the associated challenges.
Objectives of study
The thesis aims to analyze the effects of flat-rate duties on cigarette consumption, government revenue, and cigarette smuggling in Asian countries in 2020 It also seeks to provide recommendations for the Vietnamese government to reduce smoking rates and address the ongoing challenges associated with tobacco use.
The primary objectives of this study are to analyze the effects of flat-rate duties on cigarette consumption, government revenue, and cigarette smuggling in Asian countries Additionally, the research aims to provide recommendations for the Vietnamese government to reduce smoking rates and address the lingering consequences of tobacco use.
Research questions
To obtain these two aforementioned specific research objectives, this thesis focuses on answering the following questions:
1) What is the impact of flat-rate duties on the cigarette consumption, government budget and cigarette smuggling in Asian countries?
2) What is the impact of flat-rate duties on government budget in Asian countries?
3) What is the impact of flat-rate duties on the cigarette smuggling in Asian countries?
Scope of the research
This research analyzes the effects of flat-rate duties on cigarette consumption, government budgets, and cigarette smuggling in Asian countries According to the WHO (2021), countries like the Philippines, Cambodia, Laos, Malaysia, and Thailand exhibit alarming male smoking rates exceeding 40% Tobacco-related diseases claim over 7 million lives annually in Asia, with 600,000 deaths resulting from passive smoke exposure This preventable tragedy not only impacts individual health but also affects families, communities, and national development Efforts to ratify the World Health Organization Framework Convention on Tobacco Control face challenges in Southeast Asia, a region with one of the highest smoking populations globally, partly due to frequent cigarette smuggling The data analyzed in this study is cross-sectional, collected in 2020 across 48 Asian countries.
Structure of thesis
The research consists of five chapters as followings:
Chapter 1 explains reason the topic of thesis is chosen, significance of the thesis, main objectives, some major research questions and the scope of the research.
Chapter 2 provides an overview on theoretical background of the impact of flat-rate duties on the cigarette consumption, government budget and cigarette smuggling.
Chapter 3 highlights the research methodology This chapter also describes the general econometrics model, variables and data and outlines the way to analyze data.
Chapter 4 shows the statistical results from adopted models Findings are analyzed and to make clear in reaching objectives and answering the questions in Chapter 1 Results of empirical studies by other researchers are also used to strongly support our findings.
Chapter 5 resumes main findings and recommends useful policies for Vietnam in strategy of decreasing the number of smokers and overcoming remained consequences This chapter also identifies the limitation and implications for further study.
THEORETICAL AND EMPIRICAL BACKGROUND
Theoretical background
2.1.1 Flat-rate duties and cigarette consumption
The relationship between flat-rate duties and cigarette consumption is illustrated by the demand curve, which indicates that an increase in taxes leads to higher prices for cigarettes As the government raises flat-rate duties, the supply curve shifts left, resulting in decreased consumer purchases and reduced cigarette consumption This inverse relationship highlights how higher prices due to taxation can effectively lower demand for cigarettes, as depicted in Figure 1.
2.1.2 Flat-rate duties and government budget
Vietnam's low flat-rate duties on cigarette retail prices result in the government earning only 35 cents per dollar pack, while the tobacco industry retains 65 cents (WHO, 2018) Visaruthvong (2012) noted that this significant disparity means the government benefits little from tobacco sales To effectively reduce consumption, any increase in flat-rate duties must lead to higher retail prices.
Consumer behavior regarding cigarette purchases can be analyzed through the concept of Price Elasticity of Demand, which measures how sensitive demand is to price changes According to Thomas (2015), this elasticity quantifies the percentage change in demand resulting from a price change, specifically indicating the percentage change in quantity demanded for a one percent price change, assuming all other demand factors remain constant Mathematically, Price Elasticity of Demand is determined by dividing the percentage change in quantity demanded by the percentage change in price A calculated elasticity of less than 1 indicates that the good is inelastic.
Inelastic goods exhibit a less than proportional response to price changes, such as a 40% price increase leading to only a 10% decrease in demand These goods typically possess certain characteristics that contribute to their inelasticity.
- Few, if any, available substitutes (e.g precious metals)
- Bought infrequently or a small percentage of income (e.g salt)
Consumers exhibit heightened sensitivity to price changes for goods with high elasticity When the price of a non-essential item with numerous substitutes rises, the average consumer is likely to either forgo the purchase entirely or opt for a substitute instead (Layton et al., 2016).
The cost to produce a pack of cigarettes is very cheap When buying a pack of cigarettes for a dollar, the production cost is about 20-25 cents According to WHO
Tobacco exhibits low demand elasticity and is highly addictive, meaning that significant price increases result in only minor reductions in consumption compared to other products Consequently, higher prices lead to smaller decreases in quantity consumed, ultimately increasing government revenue from cigarette taxes.
2.1.3 Flat-rate duties and cigarette smuggling
Cigarette flat-rate duties serve as a significant revenue source for governments while aiming to reduce smoking rates These excise taxes vary by country, resulting in different cigarette prices worldwide St John and Gabrielle (2021) note that increased prices often lead to a higher likelihood of tax evasion through smuggling, driven by several key factors.
Higher flat-rate duties encourage tax avoidance on disposable income and imported goods, leading multinationals to engage in transfer pricing to benefit from lower duties in certain countries This practice allows companies to underreport the value of imports, declaring them at prices lower than actual transaction values, thereby minimizing their flat-rate duties, excise duties, and value-added taxes, which ultimately fosters smuggling activities.
Despite ongoing improvements and amendments, taxation laws still contain loopholes that flat-rate duty payers exploit for fraud Common fraudulent activities include the buying and selling of invoices to legitimize transactions and the establishment of ghost businesses that issue bills before disappearing.
A significant issue is the low level of tax awareness among individuals and businesses, particularly regarding the regulations surrounding flat-rate duties This lack of understanding contributes to intentional misconduct, such as businesses engaging in cigarette sales and manipulating invoices for profit.
The administration of flat-rate duties faces significant limitations due to inadequate resources and measures to combat evasion, particularly among inspectors and examiners Some officials exploit their positions, compromising their integrity and allowing fraudulent activities to persist Additionally, there is a lack of effective coordination between flat-rate duties authorities, law enforcement, and state audit agencies, which contributes to the ongoing issue of cigarette smuggling across borders.
The rise of cash transactions, along with services like Airbnb and Grab, and e-commerce platforms such as Lazada, Tiki, and Shopee, has heightened the risk of evading flat-rate duties Many transactions go unrecorded or can be deleted post-execution, leading to unreported or inaccurately reported revenues from online sales This lack of transparency allows individuals to easily engage in the illegal trade of cigarettes.
Empirical studies
2.2.1 Flat-rate duties and cigarette consumption
Morris (2002) highlighted that flat-rate taxation poses the greatest concern regarding its impact on cigarette consumption, significantly more than marketing and smoking restrictions He noted that increases in flat-rate duties lead to a substantial decline in both volume and profits, as many smokers reduce their intake Additionally, Reynolds (2005) found that a 10% price increase could result in an 11.9% reduction in youth smoking incidence, further emphasizing the negative effects of flat-rate duties on cigarette sales.
In 1994, cigarette companies acknowledged the effectiveness of flat-rate duty increases in deterring smoking in their filings with the U.S Securities and Exchange Commission Economic research supports this, indicating that a 10 percent increase in the real price of cigarettes leads to a two percent reduction in adult smoking, a 3.5 percent decrease among young adults, and a six to seven percent decline in youth smoking Overall, such price increases result in a three to five percent reduction in total cigarette consumption.
Drope (2018) demonstrated a strong correlation between rising cigarette prices due to increased flat-rate duties and declining cigarette consumption in the U.S from 1970 to 2017 While tobacco companies primarily control cigarette pricing, federal and state flat-rate duties also significantly influence these prices Since 1970, federal flat-rate duties on cigarettes have risen from eight cents.
$1.01 per pack, with the largest one-time increase of 61.66 cents per pack occurring in 2009 Meanwhile, the average state cigarette flat-rate duties have increased from
10 cents to $1.91 per pack today Without these federal and state flat-rate duties increases, U.S cigarette prices would be much lower and U.S smoking levels would be much higher
Research by Huang & Chaloupka (2018) indicates that increasing cigarette prices and flat-rate duties is particularly effective in reducing smoking rates among Black, Hispanic, and lower-income populations Specifically, a ten percent increase in flat-rate duties can lead to a seven percent reduction in smoking among pregnant women, which helps prevent numerous spontaneous abortions and stillbirths, ultimately protecting the health of thousands of newborns Additionally, higher flat-rate duties on smokeless tobacco significantly decrease its usage, especially among young males, while raising cigar prices through similar duties effectively reduces smoking rates among both adults and youth.
2.2.2 Flat-rate duties and government budget
The World Bank (2012) estimates that a 10% increase in global flat-rate duties could boost government revenues from cigarette duties by 7% Additionally, the World Health Organization (2020) indicates that countries could potentially collect an extra $141 billion from tobacco duties if the average increase were $0.8 per pack In nations like Vietnam, where flat-rate duties constitute a small portion of retail prices, raising these duties typically does not result in a significant rise in cigarette prices or a drastic drop in consumption, thereby substantially enhancing government revenue from cigarette duties.
World Health Organization (2020) point out that, in South Africa, in the period 1991-2012, cigarette flat-rate duties, after deducting inflation, increased from
2 Rands to 10 Rands per pack As a result, cigarette flat-rate duties revenue has increased from 3 billion Rands to nearly 12 billion Rands in the community
In Thailand, from 1993 to 2012, cigarette flat-rate duties increased from 55% to 87% of the wholesale distribution price As a result, budget revenue quadrupled, from USD 500 million in 1993 to USD 2.0 billion in 2015.
In 2012, the Philippines implemented a flat-rate duties law that raised cigarette duties across various tobacco classes, aiming for a unified rate by 2017 This legislation led to a significant surge in government revenue from cigarette duties, which more than doubled from $680 million in 2012 to $1.6 billion in 2013 By 2015, collections had further increased to $2.2 billion, representing over a threefold rise compared to the period before the flat-rate duties were introduced.
In 2010, Turkey significantly raised flat-rate duties, resulting in an increase in retail prices from 58% to 63% and raising the absolute flat-rate duties floor for packs of 20 cigarettes from 1.55 TL to 2.65 TL This adjustment led to a more than double fluctuation in cigarette prices Consequently, the government's revenue from cigarette flat-rate duties surged by over 40%, rising from TL 11 billion in 2009 to TL 15.9 billion in 2011.
Between 2006 and 2013 in Brazil, the flat-rate duties on tobacco significantly increased, leading to a 74% rise in the average real price of cigarettes Consequently, government revenue from these flat-rate duties surged by 48%, climbing from 3.5 billion reais in 2006 to 5.1 billion reais in 2013 However, this increase in revenue occurred alongside a 32% decline in domestic tobacco distribution sales, which fell from 6.56 billion packs in 2006 to 3.8 billion packs in 2013.
2.2.3 Flat-rate duties and cigarette smuggling
Real-life examples challenge the previously mentioned theory Phan (2020) emphasizes that the mindset of “if you can’t manage it, you can’t ban it” is not applicable, particularly in Vietnam's rapidly evolving technological landscape International evidence indicates that raising flat-rate duties on tobacco products can enhance budget revenue, decrease smoking rates, and subsequently lower disease prevalence, without leading to an increase in tobacco smuggling Furthermore, Nguyen et al (2020) highlight that the lack of correlation between tax changes and smuggling suggests that potential increases in excise tax should not be hindered by fears of rising illicit trade.
Vietnam's low domestic cigarette prices facilitate access to illicit cigarettes, necessitating government action to curb this issue To effectively reduce the prevalence of illicit tobacco, the government should consider raising cigarette taxes to increase domestic prices and implement robust policies for a more transparent environment Research by Lecours et al (2012) indicates that in France, tripling cigarette prices led to a one-third reduction in consumption and doubled tax revenue Similarly, in Thailand and the Philippines, increasing flat-rate tobacco taxes over the years has successfully reduced consumption while boosting budget revenue without escalating cigarette smuggling.
According to Lam (2020), excise tax is not a significant factor influencing cigarette smuggling; rather, the primary issue stems from excessively high import tax barriers, which currently stand at 135% of the import price Additionally, the imposition of special consumption tax and value-added tax further exacerbates the smuggling situation.
Le (2020) supported Lam's research (2020) by asserting that there is no significant correlation between tax increases and the rise in smuggling activities Various countries exhibit high tax rates alongside low smuggling rates, and conversely, some have low taxes with high smuggling Notably, in Vietnam, cigarette smuggling persists even in the absence of tax hikes.
RESEARCH METHODOLOGY
Research approach
This chapter presents the research methodology and data aimed at addressing the questions outlined in Chapter 1 It explores the relationships among variables such as flat-rate duties, cigarette consumption, government budget, and cigarette smuggling, utilizing a linear regression model and the ordinary least squares (OLS) estimation method.
Simple linear regression analysis examines the relationship between a dependent variable \( Y \) and an independent variable \( X \) using a linear function This method estimates the functions based on collected data.
The population regression model is represented by the equation \( Y = \beta_0 + \beta_1 X + u_i \), where \( \beta_0 \) denotes the intercept, and \( \beta_i \) represents the slope coefficients of the independent variables The estimators of these coefficients are indicated by \( \hat{\beta}_i \), while \( u_i \) signifies the disturbance term, and \( \hat{u}_i \) refers to the residuals.
The method of least squares, often referred to as least squares or mean squares, is an optimization technique used to determine the best fit line for a dataset This method minimizes the sum of the errors between the fitted line and the actual data points, ensuring an optimal representation of the data's trends.
Model establishment
This paper will be focus on the relationship between flat-rate duties, cigarette consumption, government budget and cigarette smuggling among Asian countries in 2020.
This study employs three simple linear regression models to explore the connections between flat-rate duties, cigarette consumption, government budgets, and cigarette smuggling in Asian countries The analysis utilizes a log-log function to represent these relationships.
Population regression models: lnCON i =❑ 01 +❑ 11 lnFL i + à i (2) lnGOV i =❑ 02 +❑ 12 lnFL i + à i (3) lnSMUG=❑ 03 +❑ 13 lnFL i + à i (4)
The sample regression model is represented by three equations: 1 \$\ln CON_i = \hat{\beta}_0 + \hat{\beta}_1 \ln FL_i + \epsilon_i\$ 2 \$\ln GOV_i = \hat{\beta}_0 + \hat{\beta}_2 \ln FL_i + \epsilon_i\$ 3 \$\ln SMUG = \hat{\beta}_0 + \hat{\beta}_3 \ln FL_i + \epsilon_i\$ In these equations, \$\hat{\beta}_0\$ denotes the intercept of the population regression model, while \$\hat{\beta}_i\$ represents the slope coefficients corresponding to the independent variables The term \$\epsilon_i\$ signifies the disturbance, and \$\hat{\epsilon}_i\$ indicates the residuals.
Equations (2) – (4) demonstrate that the flat-rate duties variable (FL) significantly influences cigarette consumption (CON), government budget (GOV), and cigarette smuggling (SMUG) This thesis aims to elucidate the relationships among these three dependent variables in relation to a single independent variable, establishing that their logarithmic relationship is linear.
Variable description
The data consists of observations of all Asian countries’ flat-rate duties (FL) in
In 2020, the relationship between cigarette consumption (CON), government budget (GOV), and cigarette smuggling (SMUG) was analyzed using data from Asian countries' flat-rate duties sourced from the World Bank This analysis highlights the impact of taxation on cigarette consumption and smuggling, as detailed in the WHO's annual report on cigarette prevention.
(https://www.who.int/news-room/fact-sheets/detail/tobacco)
The term "cigarette" refers to a product containing aromatic leaves, primarily associated with tobacco Scientific evidence indicates that tobacco use significantly shortens life expectancy and increases the risk of lung cancer In response, many countries, including the United States, mandate large health warnings on cigarette packaging and prohibit advertising for tobacco products Beyond traditional cigarettes, there are also alternatives such as smokeless cigarettes and electronic cigarettes, as well as various agricultural tobacco products.
Smoking is the primary method of consuming cigarettes, which are the most widely smoked substance Cigarettes often contain agricultural products mixed with additives that are burned, allowing the active ingredients to be inhaled and absorbed through the lungs or mouth The combustion process is typically enhanced with potassium or nitrates Cigarette smoke triggers chemical reactions at nerve endings, leading to increased heart rate, alertness, and reaction time, while also releasing dopamine and endorphins that contribute to the pleasure of smoking Between 2008 and 2010, approximately 49% of men and 11% of women aged 15 and older in 14 low- and middle-income countries used cigarettes, with about 80% of smokers preferring this method of consumption The gender gap in smoking prevalence is less pronounced among younger age groups.
Government budget from cigarette tax
The state budget, also known as the government or national budget, is a crucial economic and historical component of the financial system, widely referenced in the economic and social contexts of all nations While the term is commonly used, its definition varies across different schools of thought and research fields Russian economists define the state budget as a detailed account of a country's revenues and expenditures over a specific period The evolution of the state budget is closely linked to the emergence of a commodity-monetary economy and the production methods within a community, indicating that the establishment of a state and the presence of a commodity-monetary economy are fundamental to the creation and growth of the state budget.
The government budget generated from cigarette taxes represents the revenue collected from the consumption, production, and importation of tobacco products This budget is determined by multiplying the tax rate by the total number of cigarettes available in the market over a specific period, typically one year.
Smuggling refers to the illegal trade of goods across borders, posing significant risks to society and violating the state's foreign trade regulations As a result, Vietnam's criminal law categorizes smuggling as a criminal offense to address its detrimental impact.
Smuggled tobacco products refer to items made from tobacco, including cigarettes, cigars, and pipe tobacco, that are imported illegally without proper invoices or documentation.
Flat-rate duties are implemented to prevent commercial fraud related to import prices, ensuring that regardless of the invoice amount, the state receives the appropriate duties These duties are calculated based on a fixed rate per unit of the taxable object According to Article 6 of the 2016 Import and Export Flat-rate Duties Law, a specific flat-rate amount is established for each unit of imported or exported goods.
The flat-rate duties for exported and imported goods are calculated based on the actual quantity of goods and the prescribed flat-rate duties per unit at a specific time.
No Variable Variable name Source Unit of measurement
1 FL Asian countries’ flat-rate duties
Negative with CON. Positive with GOV, SMUG
Cigarette consumption https:// www.who.int/ news-room/fact- sheets/detail/ tobacco
Sticks per person per year
Government budget from cigarette tax Million USD
4 SMUG Cigarette smuggling Million USD
Table 1 shows the variable notation and description The notation ln used before these above notation stands for the logarithm form of the data collected for these variables.
Data description
The data used in this study are cross-sectional covering among Asian countries (48 observations).
Variables Observations Mean Standard deviation Min Max
Based on the table above, we conclude that:
Cigarette consumption varies significantly across countries, with Brunei averaging 9.7 sticks per person per year and Jordan reaching 2306.1 sticks The overall mean consumption stands at 1093.774 sticks per person annually, accompanied by a standard deviation of 647.663, highlighting the disparity in smoking habits worldwide.
Government budget collecting from cigarette tax varies from 10.6 millionUSD (South Korea) to 7900 million USD (China), the mean is 714.431 million
USD, the standard deviation is 1426.937.
The amount of cigarette smuggling ranges from 16.3 million USD (North Korea) to 3000 million USD (China), the mean is 310.099 million USD, the standard deviation is 443.391.
The flat-rate duties variable varies from 0% (North Korea) to 204% (Turkey) Table 3 shows the matrix of correlation between variables as below.
The analysis reveals a low correlation coefficient between the dependent variables (CON, GOV, SMUG) and the independent variable (FL), with absolute values ranging from 0.045 to 0.324 Notably, the correlation between SMUG and GOV is 0.778, yet it remains below the 0.8 threshold, suggesting a significant likelihood of no multicollinearity.
FL has a correlation coefficient of - 0.324 and has a negative effect on CON.
FL has a correlation coefficient of 0.125 and has a negative effect on GOV
FL has a correlation coefficient of 0.229 and has a negative effect on SMUG.
EMPIRICAL RESULTS
Linear regression model
In the previous chapters, the relationships between the variables were established, followed by the application of models using equations (2) – (4) and (5) – (7) along with the OLS estimation method, as discussed in Chapter 3, focusing on data from Asian countries in 2020 The models are represented by the following equations: \$$\ln CON_i = 2.617 - 0.349 \ln FL_i + \hat{\epsilon}_i \quad (8)\$$\$$\ln GOV_i = 2.979 - 0.579 \ln FL_i + \hat{\epsilon}_i \quad (9)\$$\$$\ln SMUG_i = 2.658 - 0.407 \ln FL_i + \hat{\epsilon}_i \quad (10)\$$
Table 4: Regression Results of model (8)
Table 4 presents the regression results indicating that the coefficient of determination, R² = 0.254, shows that flat-rate duties account for 25.4% of the variations in cigarette consumption Additionally, the adjusted coefficient of determination, R̅² = 0.237, is utilized to assess model fit when comparing different numbers of independent variables while maintaining the same dependent variable and sample size of n = 45.
Table 5: Regression results of model (9)
Table 5 indicates that the coefficient of determination, R² = 0.403, suggests that flat-rate duties account for 40.3% of the variation in cigarette consumption Additionally, the adjusted coefficient of determination, R̅² = 0.389, reflects the model's fit when incorporating other independent variables while maintaining the same dependent variable and sample size.
Table 6: Regression results of model (10)
In Table 6, the coefficient of determination \( R^2 \) is 0.4401, indicating that flat-rate duties account for 44.01% of the variations in cigarette smuggling Additionally, the adjusted coefficient of determination \( \overline{R}^2 \) is 0.4276, which is utilized to assess the model's fit when introducing new independent variables while keeping the dependent variable and sample size constant.
^ β 11 =−0.349: In condition that other factors remain unchanged, if flat-rate duties of cigarette increases by 1%, the cigarette consumption will decrease by
^ β 12 =0.579 : In condition that other factors remain unchanged, if flat-rate duties of oil increases by 1%, the government revenue from taxation will increase by 0.579
^ β 13 =0.407 : In condition that other factors remain unchanged, if flat-rate duties of oil increases by 1%, the cigarette smuggling will increase by 0.407%.
Further problems on the regression model
{ H 0 : Model does not suffer ¿ misspecification form ¿ H 1 : Model suffered ¿misspecification form ¿ Ramsey RESET test is conducted on STATA (Appendix), the result shown that:
For (9), at significance level α = 5%, we have p-value = 0.726 > α = 0.05
There is not enough evidence to reject the H0 hypothesis Therefore, the model has not omitted variables.
For (10), at significance level α = 5%, we have p-value = 0.432 > α = 0.05
There is not enough evidence to reject the H0 hypothesis Therefore, the model has not omitted variables.
For (11), at significance level α = 5%, we have p-value = 0.074 > α = 0.05
There is not enough evidence to reject the H0 hypothesis Therefore, the model has not omitted variables.
To test for heteroskedasticity, White test is applied, with the following hypotheses:
Using the command imtest, white in STATA:
For (8), at the significance level α = 5%, with p-value = 0.008< α, we have enough evidence to reject the hypothesis H0, that is, the model has heteroskedasticity.
For (9), at the significance level α = 5%, with p-value = 0.434> α, we have not enough evidence to reject the hypothesis H0, that is, the model has homoskedasticity.
For (10), at the significance level α = 5%, with p-value = 0.461> α, we have not enough evidence to reject the hypothesis H0, that is, the model has homoskedasticity.
Another way to detect the heteroscedasticity, Breusch – Pagan test is also applied
Perform hettest command, the results are obtained as follows (Appendix):
For (8), at the significance level α = 5%, with p-value = 0.000 < α, we have enough evidence to reject the hypothesis H0, that is, the model has heteroskedasticity.
For (9), at the significance level α = 5%, with p-value = 0.016 < α, we have enough evidence to reject the hypothesis H0, that is, the model has heteroskedasticity Therefore, the model (4) still has the heteroskedasticity problem.
For (10), at the significance level α = 5%, with p-value = 0.026 < α, we have enough evidence to reject the hypothesis H0, that is, the model has heteroskedasticity Hence, the model (5) still has the heteroskedasticity.
4.2.3 Test for normality of residuals
{ H 0 :the data are ¿ a normal distribution ¿ H 1 : the dataare not ¿a normal distribution ¿
Carrying out the Jarque-Bera test using STATA (Appendix) with the command "predict res, residuals", then use the command "sktest res", we get the result that:
At a significance level of α = 5%, the p-value of 0.073 indicates that there is insufficient evidence to reject the null hypothesis (H0) Consequently, both the skewness and excess kurtosis are zero, suggesting that the data follows a normal distribution, or that the residuals are normally distributed.
For (9) at significant level α = 5%, we have: p-value= 0.176> α = 0.05 There is not enough evidence to reject the H0 hypothesis Therefore, the data are from a normal distribution or the residuals is normal distributed.
For (10) at significant level α = 5%, we have: p-value= 0.065> α = 0.05 There is not enough evidence to reject the H0 hypothesis Therefore, the data are from a normal distribution or the residuals is normal distributed.
From the tests above, we conclude that models (8), (9), and (10) have heteroscedasticity, and thus we must fix this problem.
Table 7: Regression model (8) with robust standard error
Variable (3) Coefficient Robust SE t p-value
Table 8: Regression model (9) with robust standard error
Table 9: Regression model (10) with robust standard error
Hypothesis testing
4.3.1 Hypothesis testing for significance coefficients
{ H H 0 1 : : β β i i = ≠ 0 0 For model (9), lnFL has p-value= 0.008< α = 0.05, there is enough evidence to reject H0 Thus, the coefficient of lnOP is statistically significant at 5%.
For model (10), lnFL has p-value= 0.000< α = 0.05, there is enough evidence to reject H0 Thus, the coefficient of lnOP is statistically significant at 5%.
For model (11), lnFL has p-value= 0.000< α = 0.05, there is enough evidence to reject H0 Thus, the coefficient of lnOP is statistically significant at 5%.
LNSMUG i = 2.658 + 0.407 LNFL i + ^ à i The meaning of the recovery figures in the model is as follows:
^ β 11 =−0.349: In condition that other factors remain unchanged, if flat-rate duties of oil increases by 1%, the cigarette consumption will decrease by 0.349 %
^ β 12 =0.579 : In condition that other factors remain unchanged, if flat-rate duties of oil increases by 1%, the government revenue from taxation will increase by 0.579%.
^ β 13 =0.407 : In condition that other factors remain unchanged, if flat-rate duties of oil increases by 1%, the cigarette smuggling will increase by 0.407%
4.3.2 Test the overall significance of the model
{ H 0 : Model has no statistical significant
In model (9), the p-value (F) is 0.008, which is less than the significance level of 0.05, providing sufficient evidence to reject the null hypothesis (H0) and indicating that the regression model is statistically significant Similarly, in model (10), the p-value (F) is 0.000, also below the 0.05 threshold, further supporting the rejection of H0 and confirming the statistical significance of the regression model.
For model (11), we have p-value (F) = 0.000< = 0.05 At a meaningful 5%, there is enough evidence to reject H0, the regression model is statistically significant.
Conclusion: The research models are significant.
Discussion
The inverse relationship between flat-rate duties and cigarette consumption is explained through the consequences of higher price for the demand:
According to Mankiw (1997), there is an inverse relationship between price and quantity demanded, as outlined by the law of demand This law states that when the price of a good rises, the quantity demanded decreases, and conversely, when the price falls, the quantity demanded increases Additionally, the law of demand encompasses three distinct types of demand.
Individual demand refers to the specific quantity of a good or service that consumers are willing to purchase at a certain price within a defined timeframe Thus, the concept of quantity demanded is meaningful only when associated with a particular price point.
Market demand is the demand of all individuals for a good in a combined economy.
Aggregate Demand is the demand of all individuals for all goods in the combined economy.
The thesis highlights that quantity demanded decreases when flat-rate duties increase, leading to higher prices This is particularly evident for cigarettes, which are not considered a necessary good.
Morris (2002) highlights that flat-rate taxation is the most concerning issue, a sentiment echoed by Reynolds (2005), who notes that cigarette companies have acknowledged the effectiveness of flat-rate duties in reducing smoking in their U.S filings Additionally, Drope (2018) supports this view, indicating a strong correlation between rising cigarette prices due to increased flat-rate duties and declining consumption in the U.S from 1970 to 2017, despite the influence of other factors.
The strong correlation between flat-rate duties and government revenue from cigarette taxation is primarily attributed to the inelastic demand of consumers, which remains stable even as prices increase.
According to the World Bank (2012), a 10% increase in global flat-rate duties on cigarettes could boost government revenues from these duties by 7% This finding aligns with the World Health Organization's report (2020), which indicates that governments worldwide could potentially generate an additional $141 billion from tobacco flat-rate duties if the average increase were $0.8 per pack.
(2020) also pointed out that, in South Africa, in the period 1991-2012, cigarette flat- rate duties, after deducting inflation, increased from 2 Rands to 10 Rands per pack.
As a result, cigarette flat-rate duties revenue has increased from 3 billion Rands to nearly 12 billion Rands in the community
When flat-rate duties on tobacco rise, leading to tax hikes and price increases, the demand for cigarettes typically decreases However, many smokers find it difficult to quit due to addiction, resulting in continued purchases despite higher prices Consequently, government revenue from flat-rate duties on cigarettes remains stable or even increases Evidence from various countries indicates that while higher tobacco taxes can reduce consumption, they do not necessarily diminish state revenue This is because the significant tax increase per pack can offset the decline in consumption Additionally, despite a decrease in smoking rates, population growth ensures a steady influx of new smokers.
The positive relationship between flat-rate duties and cigarette smuggling are explained by the desire to get money from avoiding paying any taxes and benefit from that:
The demand for cigarettes is rising, yet the supply remains unbalanced, with domestic products failing to meet consumer quality and taste preferences In contrast, international markets offer a diverse range of cigarette types that are continually evolving in design and quality Additionally, smuggled cigarettes are often priced lower than their domestic counterparts, making them more appealing to consumers As societal consumption needs shift, there is an increasing demand for higher quality, variety, and innovative designs in cigarettes, prompting foreign brands to compete aggressively and infiltrate the local market through smuggling.
Smuggling is on the rise due to the significant profits associated with smuggled goods For instance, an iPhone 11 purchased abroad for $600 (approximately 15 million VND) can sell for up to 25 million VND in Vietnam, while the iPhone 11 Pro Max, costing $800 (around 19 million VND), can reach 30 million VND in the local market These high profit margins incentivize individuals to employ various tactics to engage in smuggling Similarly, the compact nature and ease of transportation of cigarettes, combined with a staggering 350% profit margin and the ability to evade multiple taxes—including a 70% special consumption tax—make cigarette smuggling highly lucrative, second only to drug trafficking.
Nguyen et al (2020) argue that the lack of correlation between tax changes and smuggling indicates that potential increases in excise tax should not be hindered by concerns over illicit trade Additionally, Lecours et al (2012) found that in France, tripling the price of cigarettes led to a one-third reduction in consumption and a doubling of tax revenue Similarly, in Thailand and the Philippines, raising the flat-rate tobacco tax over the years has successfully decreased consumption while increasing budget revenue without escalating cigarette smuggling.
CONCLUSION AND POLICY IMPLICATIONS
Conclusion
Flat-rate duties significantly influence cigarette consumption, government tax revenue, and cigarette smuggling in Asian countries, as highlighted in the findings from 2020 The negative correlation between flat-rate duties and cigarette consumption is attributed to the principle that higher prices lead to decreased demand Conversely, the positive correlation between flat-rate duties and government tax revenue arises from the inelastic demand of habitual smokers, who find it challenging to quit despite price increases Additionally, the relationship between flat-rate duties and cigarette smuggling is driven by the financial incentives for smugglers to evade taxes, with higher duties resulting in greater profits for those engaged in illegal trade.
The primary aim of implementing flat-rate duties on cigarettes is to mitigate the negative impacts of tobacco on society Increasing these duties is expected to lower tobacco demand and deter youth from smoking Higher taxes elevate cigarette prices, prompting some smokers to quit or cut back, while also discouraging new smokers However, elevated flat-rate duties can inadvertently lead to increased cigarette smuggling Therefore, it is crucial for the government to focus on strategies to combat smuggling, as failure to do so could result in higher cigarette consumption and significant revenue losses from illicit trade.
Policy implications
Vietnam ranks among the top 15 countries globally in terms of the number of smokers To effectively reduce smoking rates and safeguard public health, it is essential to increase the excise tax on cigarettes The Ministry of Finance has proposed two options in the draft Law amending the Tax Law: maintaining proportional excise taxes or implementing a flat-rate tax alongside a relative tax increase However, the current low price of cigarettes means that percentage-based taxes yield minimal revenue Additionally, the slow decline in smoking rates can be attributed to insufficient tax increases, which fail to significantly impact retail prices and do not keep pace with rising inflation and per capita income Therefore, the Vietnamese government should consider raising the flat-rate duties on cigarettes, with many researchers recommending a rate of 5,000 VND (approximately US$ 0.20) per pack.
To combat tobacco smuggling, it is essential for the government and relevant ministries to enforce strict regulations Local authorities must enhance coordination and management efforts to effectively patrol and control the illegal import, storage, transportation, and trade of cigarettes, cigars, and e-cigarettes Special focus should be placed on monitoring key routes, border areas, and entry points to prevent these illicit activities.
The Ministry of Health and mass media agencies must enhance public communication regarding the dangers of cigarettes, cigars, e-cigarettes, smuggled heated cigarettes, and counterfeit products Raising awareness about the health risks associated with these tobacco products is crucial By understanding these harmful effects, the Vietnamese population is more likely to focus on quitting smoking and supporting others in their efforts to stop using tobacco.
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FL 48 3054792 404248 0 2.04 SMUG 48 310.0958 443.3907 16.3 3000 GOV 48 714.4312 1426.937 10.6 7900 CON 48 1093.744 647.6629 9.7 2306.1 Variable Obs Mean Std Dev Min Max sum CON GOV SMUG FL
corr FL CON GOV SMUG
_cons 2.617221 0931599 28.09 0.000 2.429587 2.804854 LNFL -.3485908 0890175 -3.92 0.000 -.5278812 -.1693003 LNCON Coef Std Err t P>|t| [95% Conf Interval]
Total 8.47302044 46 184196097 Root MSE = 37474 Adj R-squared = 0.2376 Residual 6.31949167 45 140433148 R-squared = 0.2542 Model 2.15352877 1 2.15352877 Prob > F = 0.0003 F(1, 45) = 15.33 Source SS df MS Number of obs = 47 reg LNCON LNFL
_cons 2.97976 1101401 27.05 0.000 2.757927 3.201594 LNFL 5794575 1052427 5.51 0.000 3674878 7914271 LNGOV Coef Std Err t P>|t| [95% Conf Interval]
Total 14.7837628 46 321386147 Root MSE = 44305 Adj R-squared = 0.3892 Residual 8.83314526 45 196292117 R-squared = 0.4025 Model 5.9506175 1 5.9506175 Prob > F = 0.0000 F(1, 45) = 30.32 Source SS df MS Number of obs = 47 reg LNGOV LNFL
Ho: model has no omitted variables
Ramsey RESET test using powers of the fitted values of LNCON
Ho: model has no omitted variables
Ramsey RESET test using powers of the fitted values of LNGOV
Ho: model has no omitted variables
Ramsey RESET test using powers of the fitted values of LNSMUG
Prob > chi2 = 0.0081 chi2(2) = 9.63 against Ha: unrestricted heteroskedasticity
White's test for Ho: homoskedasticity
Prob > chi2 = 0.4336 chi2(2) = 1.67 against Ha: unrestricted heteroskedasticity White's test for Ho: homoskedasticity
Prob > chi2 = 0.4614 chi2(2) = 1.55 against Ha: unrestricted heteroskedasticity White's test for Ho: homoskedasticity
Variables: fitted values of LNCON
Breusch-Pagan / Cook-Weisberg test for heteroskedasticity
Variables: fitted values of LNGOV
Breusch-Pagan / Cook-Weisberg test for heteroskedasticity
Variables: fitted values of LNSMUG
Breusch-Pagan / Cook-Weisberg test for heteroskedasticity
_cons 2.617221 1434345 18.25 0.000 2.328329 2.906113 LNFL -.3485908 1251674 -2.78 0.008 -.6006908 -.0964907 LNCON Coef Std Err t P>|t| [95% Conf Interval] Robust
Root MSE = 37474 R-squared = 0.2542 Prob > F = 0.0078 F(1, 45) = 7.76 Linear regression Number of obs = 47 reg LNCON LNFL, robust
_cons 2.97976 1090101 27.33 0.000 2.760203 3.199318 LNFL 5794575 1368 4.24 0.000 3039282 8549867 LNGOV Coef Std Err t P>|t| [95% Conf Interval] Robust
Root MSE = 44305 R-squared = 0.4025 Prob > F = 0.0001 F(1, 45) = 17.94Linear regression Number of obs = 47 reg LNGOV LNFL, robust