The Vietnam Case: How to draw a clear path forward for optimal tobacco taxation

The Vietnamese government has taken steps to increase taxation on tobacco products, but there is a huge lack of local evidence to help policymakers develop effective tobacco control policies.

Having recently embarked upon tobacco tax reform to lower tobacco consumption in the country, the government’s first step was increasing excise taxes on tobacco products from 65% to 70% in January 2016. They were raised again to 75% in January 2019.

This study was designed to collect a unique dataset on tobacco consumption across Vietnam, both before and after the proposed tax hike on tobacco products in January 2019. This would accurately estimate the price elasticity (Price elasticity of demand is a measurement of the change in consumption of a product in relation to a change in its price.) of tobacco products. The target population was both male and female smokers above the age of 15.

This research tracked the response of both the industry and the consumers' responses to tobacco prices to evaluate the effectiveness of implemented measures and provide recommendations on necessary adjustments.

Price elasticity and taxation

How does taxation work? Analysis of the price elasticity of demand for cigarettes in Vietnam.

Price elasticity is a measurement of the change in consumption of a product in relation to a change in its price. This study indicates that the price elasticity of cigarette consumption is statistically significant. In numbers, this means that for a 10% increase in the average price, cigarette consumption would decrease by 2.15%.

In addition, the absolute value of the estimated price elasticity of cigarette consumption is small. This means that a given percentage increase in the price of cigarettes leads to a less than proportional decrease in the quantity of cigarettes consumed, while generating higher tax revenues for the government.

From a policy perspective, two actions are urgently needed to reduce tobacco consumption in Vietnam:

1. Significantly raise tobacco taxes to make cigarettes increasingly expensive.
2. Ensure the tax structure includes specific excise taxes to reduce price variation between brands.

Is taxation effective? Analysis of the Tobacco Tax System in Vietnam.

To understand if taxation increases led to reduced consumption, difference-in-difference (DID) estimations were performed to identify the effect of the 2019 tax increase on cigarette retail prices. This empirical strategy can identify the effectiveness of the cigarette tax by comparing the treated items (domestic cigarettes) with those of a control group (illicit ones).

Results suggest that the cigarette tax is not quickly passed on to consumers. One possible reason for this delay is that stores stockpile cigarettes prior to a tax change to avoid the impact of the tax. There are reasons to believe that Vietnamese sellers practice stockpiling as well, given that the government announced the 2019 excise tax increase as early as 2013.

Additionally, most retailers operate on a small scale, thus they are at the lower tier of the distribution chain. Price adjustment moves from manufacturers to wholesalers and higher-tier distributors before eventually reaching low-tier retailers.

For two different price segments, economy (inexpensive) and premium (expensive price), a different response was noted in retail prices. The real price hike for the premium brand was USD0.06 compared with USD0.02 for economy brands.

The importance of doing this research, especially in the Vietnamese context.

This project is the first to empirically estimate the change in smoker behaviour in response to cigarette price changes in Vietnam.

The research findings are particularly important because they highlight how variances in the taxation system can lead the tobacco industry to be more or less productive and profitable by reducing revenue collection and increasing socioeconomic inequality related to tobacco consumption.

The research and analysis provided by this Vietnam-specific empirical work complements the available global evidence on the effectiveness of tobacco taxation and contributes to the momentum for tobacco tax reform.

Team and partners list

Nguyen Ngoc Anh, PhD (Team Leader), Development and Policies Research Center, Hanoi, Vietnam

Methodology and references

For the DID research: Cigarette brands were split into different price categories. Respondents shared their preferred cigarette brand both before and after the tax reform. Research also examined whether increased taxation would encourage a consumer switch toward illicit cigarettes.

Promoting key learnings

Celebrating the culmination of over a decade of partnerships, research and advocacy, a webinar was planned in partnership with Cancer Research UK, “Demystifying the Economics of Tobacco Control: Knowledge, policy and everything in between,” and broadcast live on June 29, 2022.

This webinar represented an opportunity to demystify the process of knowledge translation, to share key learnings from our research teams across the globe and to discuss the emerging opportunities for continued and meaningful impact.

ETCRI Funding

The Call for Concept Notes on the Economics of Tobacco Control in Low and Middle- Income Countries offered up to CAD1 million over a maximum of four years to support evidence-based research on the economic rationale for the adoption of tobacco-control policies across LMICs in four regions: Asia, Latin America and the Caribbean, the Middle East and North Africa, and sub-Saharan Africa.

By targeting collaborative, applied economics research, the Initiative aimed to support the implementation of effective fiscal and other policy measures to help prevent tobacco-related diseases and save lives.