Cigarette Tax Reform in Lebanon: A Simulation

This Report was written by American University of Beirut (AUB) in Lebanon. The report estimates the impact of two potential tax reforms on consumption and tax revenues. Specifically, the researchers considered two scenarios: an adjustment of the VAT or the introduction of a specific excise tax. The findings show that raising the VAT from the current rate of 11% to 15% would decrease consumption by 2%, or 200,00 packs per week, and increase yearly tax revenues to $137 million. Increasing the VAT would not substantially impact the price gap between local and foreign brands. In contrast, introducing a specific excise tax that varies between $0.10 and $2 per pack would lead to significant reduction in consumption and large tax revenue gains. A $1 specific excise tax per pack, for example, would increase total tax revenues by 400% and decrease consumption to 7.5 million packs per week. This specific excise tax would also reduce the price gap between local and foreign brands, as the local brand price would become 65% of the foreign brand price. The report concludes with recommendations for policy makers to introduce a specific tax to effectively reduce consumption and increase revenue collection.