Distributional effects of tobacco taxation on poverty and inequality in Serbia

Because smoking, tobacco spending, and price responsiveness are socially patterned, tobacco taxation is relevant not only as a fiscal and public health instrument, but also as a health equity issue. Previous studies for Serbia suggest that higher tobacco taxes are progressive and may benefit lower-income households. However, the effects of tobacco taxation on poverty and inequality in Serbia have not been assessed using formal poverty and inequality measures within an explicit analytical framework. The analysis combines two sets of simulations based on household-level data for Serbia. First, we estimate the effects of higher tobacco taxation on poverty using the Foster-Greer-Thorbecke poverty measures (headcount ratio, poverty gap, and poverty severity) and the consumption dominance approach. Second, we assess the distributional effects of higher tobacco taxation on inequality using concentration curves and the Kakwani index. Microsimulations of changes in cigarette consumption are based on income-group-specific price elasticities estimated in previous studies. We examine two scenarios relative to the 2021 baseline: a 25% increase in the specific tobacco excise and a 50% increase in the specific tobacco excise. The simulations suggest that higher tobacco taxation produces modest increases in poverty in absolute percentage-point terms, with the headcount ratio rising by up to 1% point in the higher-tax scenario, while proportional increases are more pronounced for the poverty gap and poverty severity measures. This effect can be reduced under a revenue-neutral reform, although the specific simulation based on subsidizing out-of-pocket health expenditure does not fully offset the poverty effect. The inequality analysis indicates that the tax increase makes cigarette expenditure less regressive relative to income. In Serbia, higher tobacco taxation is associated with a less regressive post-reform distribution of cigarette expenditure relative to income among smoking households, but it may also worsen poverty if additional revenues are not used in ways that protect lower-income households. These findings suggest that tobacco taxation should be assessed not only as a fiscal and tobacco-control instrument, but also as a health equity issue, because its distributive consequences depend partly on how the resulting revenues are used.