Candice Horbacz
Retail prices, influenced by a myriad of market dynamics often unrelated to the core objectives of excise taxation, present a problematic foundation for tax policy, a concern increasingly highlighted by tax experts regarding the World Health Organization’s (WHO) growing emphasis on using a tax share of retail price as a primary policy target, particularly for tobacco products, where the WHO recommends taxes account for at least 75 percent of the final retail price. This prescriptive approach, while ostensibly aimed at public health and revenue generation, is increasingly criticized for its lack of economic efficiency, potential for unintended consequences, and disconnect from the practical realities faced by diverse economies globally.
The Rationale Behind Excise Taxes and the WHO’s Stance
Excise taxes, a levy on specific goods or activities, have historically served dual purposes: generating government revenue and discouraging consumption of products deemed harmful or undesirable, such as tobacco, alcohol, and sugary beverages. For decades, global health organizations, led by the WHO, have advocated for robust tobacco taxation as a cornerstone of public health strategy. The rationale is straightforward: higher prices are expected to reduce demand, particularly among younger populations and lower-income groups, thereby curbing smoking rates and the associated burden of non-communicable diseases. The WHO’s MPOWER package, a set of six evidence-based tobacco control measures, prominently features "Raise taxes on tobacco," underscoring its perceived efficacy.
However, the specific recommendation that taxes comprise a minimum of 75 percent of the retail price represents a shift towards a more rigid, outcome-based metric rather than a focus on the tax rate itself. Proponents argue that a high tax share ensures a significant price signal to consumers, making tobacco less affordable and thus contributing to public health goals. They contend that it simplifies policy implementation by providing a clear, easily measurable benchmark for countries to aspire to, fostering a global standard for tobacco control.
Critiques of the Price Share Model: Economic Inefficiencies and Inconsistencies
Despite the WHO’s intentions, the reliance on price shares as a policy target draws significant criticism from economists and tax policy experts. The fundamental problem lies in the economic distinction between an absolute tax burden and a percentage share of a fluctuating retail price. Consumers experience the tax burden in absolute monetary terms – euros, dollars, or local currency – and their behavioral responses, such as reducing consumption or seeking alternatives, are directly tied to this absolute cost. Similarly, governments collect revenue in absolute terms. A tax representing 75 percent of a €2 product yields a vastly different absolute revenue and imposes a different absolute burden than one representing 75 percent of a €20 product. The former might yield €1.50 per unit, while the latter yields €15, demonstrating that the percentage alone provides a misleading picture of economic impact.
Furthermore, the WHO’s definition of its 75 percent target lacks consistent clarity. Its Technical Manual suggests including all taxes—import duties, excise taxes, and Value-Added Taxes (VAT/GST)—but with caveats regarding domestically manufactured versus imported goods. At other times, the guidance appears to narrow the focus exclusively to excise duties. This shifting and ambiguous directive creates practical challenges for national fiscal policymakers attempting to align their systems with the WHO’s recommendations, potentially leading to misinterpretations and inefficient tax structures. Such definitional fluidity undermines the very consistency that a global benchmark is supposed to provide.
Global Disparities and Regressive Impacts
A significant practical drawback of the 75 percent tax incidence target is its limited global applicability and the substantial changes many countries would need to undertake to conform. The WHO’s own data highlights this challenge: out of 178 countries for which it collects data, only 39 (a mere 22 percent) currently meet the recommended 75 percent tax incidence rate. A closer examination of these 39 countries reveals a stark geographical and economic bias. Twenty-five of them are classified as high-income countries by the World Bank, with 20 of these located within the European Union. This demographic skew strongly suggests that the benchmark is not globally representative, nor is it easily achievable for the majority of the world’s nations, particularly low- and middle-income countries.
Policies that may be feasible or even effective in high-income economies with established regulatory frameworks, sophisticated tax administrations, and higher disposable incomes do not necessarily translate well to less-developed countries. In many developing nations, the informal economy is substantial, enforcement capabilities are limited, and consumer price sensitivity can be extremely high. Imposing a blanket percentage target ignores these crucial socio-economic differences.
Moreover, a severe critique leveled against high percentage-based tobacco taxes is their inherently regressive nature. Tobacco consumption is often disproportionately higher among lower-income populations. Therefore, layering steep increases on products primarily purchased by these groups means that a higher percentage of their already constrained disposable income is diverted to taxes. At a time when households globally grapple with escalating costs for housing, groceries, fuel, and other essentials, such policies risk exacerbating financial strain for those least able to bear it. This can deepen existing inequalities and create significant social equity concerns, even if the public health objective is laudable. Critics argue that while the goal of reducing smoking is important, the means should not disproportionately burden the most vulnerable segments of society.
Tax Incidence vs. Tax Burden: A Critical Distinction
Policymakers must distinguish clearly between tax incidence and tax burden. Tax incidence, as calculated by the WHO, is the ratio of total taxes to the retail price. However, the true economic burden on consumers, or the revenue generated for governments, depends on the absolute tax amount and the volume of taxed sales. It is entirely possible, as the original article points out, to observe a high tax incidence with a relatively low tax burden (e.g., Bangladesh, where overall prices and absolute taxes might be low) and vice versa (e.g., Germany, where a lower incidence percentage could still represent a significant absolute tax and burden due to higher pre-tax prices).
This discrepancy arises because while government policy directly influences the tax component (the numerator), the denominator – the retail price – is comprised of taxes plus pre-tax prices. These pre-tax prices are influenced by manufacturing and distribution costs, profit margins, retail competition, and broader economic conditions, all of which vary substantially across geographies and are largely beyond the direct control of tax authorities. Therefore, attempting to target a measure that is significantly influenced by external market factors makes for an unstable and unpredictable policy objective.
The Appeal of Ad Quantum Taxes
Instead of targeting a variable like retail price over which they have limited control, critics advocate for tax policy to focus on measures directly controllable by governments, such as specific tax rates. An ad quantum tax, defined as a fixed amount in euros, dollars, or local currency per unit (e.g., per pack of cigarettes or per gram of tobacco), is considered a far more robust and transparent policy target.
Basic economic principles affirm that higher prices for a specific product will, ceteris paribus, decrease legal sales. If the policy goal is to raise the price of legal cigarettes to discourage consumption, then directly targeting an ad quantum rate is a more direct and predictable mechanism. Similarly, tax revenues are a function of these absolute tax rates and sales volumes, not merely the tax incidence percentage. Ad quantum taxes offer predictability for both consumers and governments, facilitate easier administration, and allow for direct adjustments based on revenue goals or desired behavioral changes. They isolate the policy lever directly within the government’s purview, reducing the impact of fluctuating market prices on policy outcomes.
The Peril of Unintended Consequences: Illicit Trade
Perhaps the most significant unintended consequence of aggressive, percentage-based tax targets, particularly those leading to very high absolute prices, is the incentivization of illicit trade. Consumer responses to price increases are complex and vary significantly across products, income groups, and markets. As taxes drive up legal prices, the potential for substitution, avoidance, cross-border purchases, and illicit activity escalates, undermining both revenue generation and public health objectives.
The relationship between higher tax rates and higher revenue is not linear; there is an optimal point beyond which further tax increases can lead to diminishing returns due to widespread tax evasion. In cigarette markets, this phenomenon is well-documented. Consumers, faced with prohibitive prices, may travel to jurisdictions with lower taxes for cross-border shopping. More alarmingly, illicit market entrepreneurs exploit the price differential, developing black and gray markets for smuggled, counterfeit, or untaxed products. These illicit goods are often sold at significantly lower prices, making them accessible even to those with limited disposable income, including minors.
Reports on illicit cigarette consumption vividly illustrate this problem. For instance, a 2025 analysis indicated that over 10 percent of cigarettes consumed in the EU were counterfeit or contraband, amounting to nearly 42 billion illicit cigarettes and an estimated €16.7 billion in lost tax revenues for Member States. The correlation between high tax rates and smuggling is strong and consistently observed. Countries like Ireland and France, which levy some of the highest cigarette taxes in the EU (€10.71/$12.58 per pack in Ireland), also grapple with some of the highest rates of illicit consumption. More than a third of cigarettes consumed in these nations are not legally purchased within their borders. Across the EU, studies suggest that an additional euro in tax per pack of 20 cigarettes can increase smuggling by approximately 7 percent.
This surge in illicit trade directly undermines the public health rationale behind tobacco taxation. Products that circumvent tax regimes also bypass crucial regulatory oversight concerning ingredients, manufacturing standards, and age restrictions. Consumers are exposed to potentially more harmful, unregulated products, and the accountability of legal systems for injuries caused is lost. Furthermore, the revenue intended for public services or health initiatives is diverted into the hands of criminal networks, sometimes funding other illicit activities.
Case Studies: Ireland’s Experience
Ireland provides a compelling case study of how high tax incidence, even when achieving the WHO’s target, can fail to deliver expected public health and revenue outcomes. Despite levying the highest cigarette tax in the EU, Ireland has struggled to meet its smoking reduction goals. The country’s ambitious target to decrease smoking rates to less than 5 percent by 2025 was missed by a factor of more than three, with smoking rates stubbornly remaining around 17 percent. This persistence of smoking, despite exorbitant legal prices, strongly suggests that a significant portion of consumption is being met through illicit channels, demonstrating that simply achieving a high tax incidence does not automatically translate into effective public health policy or robust tax collections. The public purse suffers from lost revenue, and the public health objective remains elusive.
Moving Forward: Towards Evidence-Based and Context-Specific Tax Reforms
The critique of the WHO’s 75 percent tax incidence target is not a call to abandon tobacco taxation but rather a demand for more nuanced, evidence-based, and context-sensitive approaches. A universal tax incidence target ignores critical differences in existing tax systems, consumer behavior, market structures, and enforcement capabilities across diverse countries. It risks fostering greater tax evasion and illicit trade, thereby undermining the very revenue and public health goals it seeks to achieve.
Instead of pursuing arbitrary price benchmarks, policymakers should focus on designing tax reforms that directly target harmful consumption while considering the broader economic and social landscape. This involves:
- Prioritizing Ad Quantum Taxes: Implementing specific tax rates per unit of product offers greater predictability, administrative simplicity, and direct control for governments, aligning tax policy more closely with revenue and behavioral objectives.
- Conducting Country-Specific Assessments: The "right" level of taxation is profoundly different from one country to the next. It must be determined through careful analysis of economic development, public policy objectives, enforcement capabilities, consumer price elasticity, and the prevalence of illicit markets.
- Strengthening Enforcement: Any robust taxation strategy must be accompanied by strong enforcement measures to combat illicit trade. This includes cross-border cooperation, intelligence sharing, and effective policing to dismantle smuggling networks.
- Considering Tiered Systems: For certain products, tiered tax systems (e.g., lower taxes on less harmful alternatives, if scientifically validated) could be explored to guide consumers towards lower-risk choices, where appropriate and consistent with public health goals.
- Focusing on Broader Tobacco Control Measures: Taxation is one tool among many. Complementary measures such as plain packaging, advertising bans, public awareness campaigns, and cessation support programs remain vital for comprehensive tobacco control.
Ultimately, the goal of public health policy is to improve population health outcomes, and the goal of tax policy is to generate revenue efficiently and equitably. When these two objectives are pursued through a rigid, percentage-based target that overlooks economic realities and incentivizes illicit activities, both goals are jeopardized. A critical reevaluation of global health policy recommendations, moving towards flexible, country-specific, and economically sound approaches, is imperative to ensure that tobacco taxation genuinely contributes to healthier societies and sustainable public finances.
