Candice Horbacz
The World Health Organization’s (WHO) increasing advocacy for a specific tax share of retail price as a primary policy target for excise taxes, particularly its recommendation that tobacco taxes account for at least 75 percent of the final retail price, has sparked significant debate among economic policy experts and fiscal authorities worldwide. This approach, which focuses on "tax incidence" as a measure of the proportion of the retail price constituted by taxes, is being scrutinized for its effectiveness, economic rationality, and practicality, with many arguing that retail prices often reflect a myriad of factors unrelated to the fundamental objectives of an excise tax.
Understanding Excise Taxes and the WHO’s Public Health Mandate
Excise taxes are indirect taxes levied on the sale or production of specific goods or services, often those deemed harmful or luxurious. Historically, these taxes have served a dual purpose: generating revenue for governments and discouraging the consumption of particular products, such as tobacco, alcohol, and increasingly, sugary beverages. For tobacco, the public health imperative is clear. The WHO has been a global leader in advocating for robust tobacco control measures, encapsulated in its MPOWER package – a set of six evidence-based interventions designed to reduce tobacco use. Taxation, specifically "raising taxes on tobacco," is a cornerstone of this strategy, recognized as one of the most effective ways to reduce demand and improve public health outcomes by making tobacco products less affordable.
The rationale behind taxing tobacco products heavily is rooted in the concept of negative externalities. Tobacco consumption imposes significant costs on society, including healthcare expenses for treating smoking-related diseases, lost productivity due to illness and premature death, and environmental damage from tobacco cultivation and waste. Excise taxes are intended to internalize these external costs, making the price of tobacco more accurately reflect its true societal burden, thereby discouraging consumption, especially among younger populations and lower-income individuals who are often more price-sensitive. The WHO’s push for higher tobacco taxes gained significant momentum following the adoption of the Framework Convention on Tobacco Control (FCTC) in 2003, which explicitly recognizes price and tax measures as effective tools for reducing tobacco demand.
The Contested 75 Percent Target: A Deeper Look
However, the specific mechanism by which the WHO recommends achieving these public health goals – a universal target of 75 percent tax incidence – is where the contention lies. According to the WHO’s Technical Manual on Tobacco Tax Administration, this 75 percent target is meant to encompass all taxes, including import duties, excise taxes, and value-added taxes (VAT) or goods and services taxes (GST). This broad definition, however, immediately introduces complexities. The inclusion criteria for various tax types can shift depending on whether cigarettes are domestically manufactured or imported, leading to definitional ambiguities. At times, WHO guidance appears to suggest that fiscal policymakers should focus solely on excise duties, further muddying the waters and creating inconsistent policy signals for national governments. This lack of clear, consistent definitions poses a significant challenge for countries attempting to conform to the recommendation, making accurate measurement and implementation difficult.
Economists argue that focusing on a percentage of the retail price as a policy target is fundamentally flawed because it disregards the absolute economic burden on consumers and the absolute revenue generated for governments. A tax that accounts for 75 percent of a €2 product is economically distinct from one that accounts for 75 percent of a €20 product. Consumers experience the tax burden in tangible, absolute currency terms, and their behavioral responses (e.g., reducing consumption, seeking alternatives) are driven by these absolute costs, not by abstract percentages. Similarly, governments collect revenue in absolute amounts, which is crucial for funding public services and achieving specific fiscal targets. Therefore, good tax policy should be designed around specific revenue growth objectives and the desired behavioral changes, neither of which are effectively addressed by a price-based incidence target. This perspective is often championed by economic think tanks like the Tax Foundation, which consistently advocates for tax policies grounded in economic principles and practical outcomes rather than arbitrary benchmarks.
Global Disparity in Implementation and Impact
A significant practical drawback of the WHO’s 75 percent target is the vast chasm between the recommendation and current global realities. Data published by the WHO itself reveal that out of 178 countries for which information is collected, a mere 39 nations – approximately 22 percent – actually meet the recommended 75 percent tax incidence rate for tobacco. This stark statistic immediately calls into question the universality and practicality of the benchmark, suggesting that it might be an aspirational goal rather than a universally achievable or even desirable one.
A closer examination of the 39 countries that do meet the target further illuminates the issue. The World Bank classifies 25 of these nations as high-income countries, with 20 of them located within the European Union. This demographic skew suggests that the benchmark is far from globally representative. Policies that may be feasible and effective in highly developed economies, characterized by robust administrative capacities, established regulatory frameworks, and higher disposable incomes, do not necessarily translate well to less-developed or low-income countries. These nations often grapple with different economic structures, varying consumption patterns, weaker enforcement mechanisms, and a larger informal economy, making the implementation of such high, universal targets particularly challenging and potentially counterproductive.
For instance, imposing a steep 75 percent tax share in a low-income country where the average retail price of cigarettes might be significantly lower, but where disposable income is also meager, could have a disproportionately severe impact on the poorest segments of the population. This brings us to a critical social dimension of excise taxes. Public health advocates, while supporting tobacco taxation in general, sometimes acknowledge the need for careful calibration to avoid exacerbating poverty, especially in developing nations where a significant portion of the population lives close to the poverty line.
Economic Principles and Regressive Outcomes
Higher cigarette taxes, while intended to deter consumption, disproportionately impact lower-income individuals. Tobacco use, unfortunately, often exhibits an inverse relationship with socioeconomic status, meaning lower-income residents tend to smoke at higher rates. Consequently, layering another steep increase on a product predominantly purchased by these groups can exacerbate existing financial vulnerabilities. In an era of rising costs for housing, groceries, fuel, and other essential goods, such tax policies risk deepening financial strain for families already struggling to meet basic needs. This regressive nature of excise taxes on common consumption items is a well-documented economic phenomenon, where the tax burden consumes a larger percentage of income for those with lower earnings.
Moreover, the effectiveness of tax policy in influencing behavior depends on the price elasticity of demand for the product. For tobacco, demand is often relatively inelastic, meaning that a price increase does not lead to a proportionally large decrease in consumption, especially for established smokers. While higher prices may deter new users, particularly adolescents, they can impose a substantial, unavoidable financial burden on existing smokers who find it difficult to quit. This effect can be particularly pronounced in lower-income communities, where addiction rates may be higher and access to cessation resources more limited. The WHO’s own reports indicate that while tobacco consumption has generally declined globally, the rates of decline vary significantly by region and socioeconomic group, suggesting that price sensitivity alone may not be a universal solution.
Tax Incidence vs. Tax Burden: A Critical Distinction
A fundamental point of confusion highlighted by critics of the WHO’s approach is the conflation of "tax incidence" with "tax burden." While the legal incidence of a tax refers to who is legally responsible for paying it (e.g., the manufacturer or retailer), the economic incidence refers to who ultimately bears the cost of the tax (e.g., consumers through higher prices, workers through lower wages, or shareholders through lower returns). The WHO’s target focuses on tax incidence as a percentage of retail price. However, the true burden felt by consumers and the revenue collected by governments are in absolute terms.
It is entirely possible, as the original analysis points out, to have a high tax incidence (taxes making up a large percentage of the retail price) but a relatively low absolute tax burden, and vice-versa. For example, a country like Bangladesh might have a high tax incidence on tobacco but, due to very low retail prices, the absolute tax burden per pack might be quite small. Conversely, Germany might have a lower tax incidence percentage but, given higher pre-tax prices and a robust economy, the absolute tax burden per pack could be substantially higher. This nuanced distinction is crucial for understanding the real-world impact of tax policy.
The reason for this divergence is rooted in the calculation of tax incidence: total taxes divided by the retail price. While government policy directly controls the numerator (taxes), the denominator – the retail price – is comprised of taxes plus pre-tax prices. These pre-tax prices are influenced by a multitude of factors over which authorities have little to no control, including manufacturing and distribution costs, supply chain efficiencies, market competition, economic conditions specific to each country, and even local retail dynamics. Therefore, a universal percentage target for tax incidence fails to account for these inherent geographical and economic variations, rendering it an imprecise and potentially misleading metric for effective policy. National governments often report struggling with this aspect, as their ability to influence market prices is limited, making the 75% target a moving and often unattainable goal.
The Perils of Illicit Trade and Tax Avoidance
One of the most significant arguments against excessively high, uniformly applied tax rates, particularly those driven by a percentage target, is their propensity to fuel illicit trade and tax avoidance. Basic economics dictates that higher prices for a legal product will, all else being equal, decrease legal sales. However, this often comes with the caveat that consumers and suppliers will seek alternatives, including illegal ones, if the price differential becomes too attractive.
As tax rates climb, the incentive for consumers to seek cheaper, untaxed alternatives intensifies. This can manifest in various ways: cross-border purchases in jurisdictions with lower taxes, and more alarmingly, the proliferation of black and gray markets for counterfeit or contraband products. These illicit markets not only deprive governments of crucial tax revenue but also undermine public health goals, as unregulated products often lack quality control, contain unknown ingredients, and are sold without age verification or adherence to public health warnings. The rise of illicit trade has been a consistent concern for law enforcement agencies and fiscal authorities globally, with estimates suggesting billions in lost revenue annually.
The European Union provides a stark illustration of this problem. A 2025 report indicated that over 10 percent of cigarettes consumed in the EU were counterfeit or contraband, amounting to nearly 42 billion illicit cigarettes. This rampant illicit trade resulted in an estimated €16.7 billion in lost tax revenues for Member States. The correlation between high tax rates and smuggling is demonstrably strong: an additional euro of tax per pack of 20 cigarettes across the EU is linked to an approximate 7 percent increase in smuggling activity. This dynamic creates a "Laffer Curve" effect for excise taxes, where beyond a certain point, increasing tax rates can paradoxically lead to lower overall tax revenue due to the rise in illicit trade.
Countries like Ireland and France, which levy some of the highest cigarette taxes in the EU (€10.71/$12.58 in Ireland), experience severe illicit trade challenges. More than a third of cigarettes consumed in these nations are estimated to be illegally purchased. Despite Ireland’s aggressive taxation policy aimed at reducing smoking rates to less than 5 percent by 2025, the country missed its target by a factor of more than three, with smoking rates stubbornly remaining around 17 percent. This demonstrates that in jurisdictions where illicit markets are robust, achieving the WHO’s target incidence rate does not necessarily translate into successful public health outcomes or increased public revenue. Instead, it can lead to a vicious cycle where higher taxes fuel illicit trade, which then undermines both revenue collection and the very public health objectives the taxes were meant to serve.
Advocating for Alternative Tax Designs: Ad Quantum Rates
Given these challenges, critics argue that policymakers should focus on tax instruments they can directly control and that are more predictable in their outcomes. An ad quantum tax, defined as a specific monetary amount per unit (e.g., euros, dollars, or local currency per pack of cigarettes), is presented as a far superior policy target. This approach moves away from a percentage of a fluctuating retail price towards a fixed, transparent charge.
The benefits of ad quantum taxes are multifaceted:
- Predictability and Stability: They provide a stable and predictable revenue stream for governments, as the tax amount is fixed per unit sold, regardless of fluctuations in retail prices driven by manufacturing costs or market competition. This allows for better fiscal planning and budgeting.
- Clarity for Consumers: The absolute tax burden is transparent to consumers, allowing them to make informed decisions based on a clear price signal. This directness can also make it easier for consumers to understand the cost of their choices.
- Direct Control: Policymakers have direct control over the specific tax rate, allowing them to adjust it strategically to achieve desired revenue goals and influence consumption behavior more precisely. This empowers governments to set rates that balance public health objectives with economic realities.
- Addressing Illicit Trade: While no tax system is immune to illicit trade, an ad quantum tax allows for more precise adjustments to balance revenue goals with the risk of stimulating illegal markets. Drastic, percentage-driven increases can create sudden, large price gaps that illicit operators exploit more readily.
- Simplified Administration: They can be simpler to administer and enforce compared to ad valorem taxes (a percentage of value) or mixed systems, particularly in countries with less developed tax administrations, thereby reducing compliance costs and opportunities for evasion.
Basic economic principles affirm that if the policy goal is to raise the price of legal cigarettes to discourage consumption, then directly targeting an ad quantum rate is more effective. Tax revenues fundamentally depend on these currency-based tax rates and the volume of legal sales, not on the tax incidence percentage.
Broader Implications for Public Health and Fiscal Policy
The debate surrounding the WHO’s 75 percent tax incidence target underscores a broader challenge in global health policy: the tension between universal recommendations and the need for context-specific solutions. While the WHO’s overarching goal of reducing tobacco consumption is laudable and critical for global public health, the prescriptive nature of a universal price-based target risks overlooking crucial economic, social, and administrative realities that vary widely across countries. This discussion has implications not only for tobacco but potentially for other products targeted by excise taxes, such as sugary drinks or alcohol, where similar debates about tax design and effectiveness are emerging.
Effective tax policy requires a nuanced understanding of consumer responses, which differ substantially across products, income groups, and markets. The relationship between higher tax rates and higher revenue is neither linear nor universally guaranteed; it is mediated by factors such as substitution effects, avoidance behaviors, cross-border purchasing, and the prevalence of illicit activities. Therefore, a "one-size-fits-all" approach can be counterproductive, potentially leading to unintended consequences such as revenue shortfalls, increased illicit trade, and disproportionate burdens on vulnerable populations, without necessarily achieving the desired public health outcomes.
Policymakers should be encouraged to implement evidence-based reforms that consider the unique circumstances of their economies, the structure of their existing tax systems, and the specific behavioral objectives they aim to achieve. This involves focusing on robust tax design, strengthening enforcement capabilities, and, where appropriate, encouraging lower-risk alternatives to traditional tobacco products as part of a comprehensive public health strategy. The challenge for global health organizations is to provide guidance that is both ambitious in its public health goals and realistic in its economic and administrative implementation.
Conclusion
In conclusion, while the World Health Organization’s commitment to reducing tobacco use through taxation is commendable, its preference for a 75 percent tax share of retail price as a universal policy target faces significant criticism from an economic perspective. This approach mistakes higher prices for guaranteed public health and tax revenue outcomes, largely ignoring the complexities of existing tax systems, diverse consumer behaviors, and the critical role of illicit trade. Rather than pursuing arbitrary price benchmarks that are difficult to define, inconsistently applied, and often globally unrepresentative, policymakers would be better served by focusing on direct, quantifiable tax rates (ad quantum taxes) that they can control. Such an approach would enable more precise targeting of harmful consumption, ensure greater revenue stability, and mitigate the unintended consequences that often arise from overly simplistic, percentage-based policy mandates in the multifaceted world of global fiscal and public health policy. The path forward demands a more sophisticated understanding of tax economics, tailored to the specific context of each nation, to truly advance both public health and fiscal stability.
