ISSN: 1648 - 4460

International Journal of Scholarly Papers

VU KHF

Transformations  in
Business & Economics

Transformations in
Business & Economics

  • © Vilnius University, 2002-2018
  • © Brno University of Technology, 2002-2018
  • © University of Latvia, 2002-2018
Article
THE COMPENSATIVE EFFECTS OF TOBACCO LEAF PRICE CHANGES ON TAX REVENUE IN CHINA
Hailong Cai, Yitian Xiao

ABSTRACT. Tobacco production in China is influenced by a government-set procurement price for tobacco leaf, and an excise tax on tobacco leaf revenue. This study examines the increase in the procurement price needed to keep tax revenue constant in the face of a 50% reduction in the tax rate. This "compensative effect" is important because reductions in the tax rate are contemplated and tobacco tax revenue is a major source of funding for rural communities. Based on an equilibrium-displacement model of China's tobacco sector, results suggest the "Compensated Effect Elasticity" (CEE) is between 1.0 and 2.5. This means a 50% cut in the tax rate would necessitate an increase in the procurement price of between 50% and 125%. Sensitivity analysis indicates CEE is most sensitive to the retail demand and input substitution elasticities and least sensitive to oligopoly power and returns to scale .

KEYWORDS:  China, tobacco, tax, government, market power.

JEL classification:  H25, Q11, L13.

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Scholarly papers Transformations in Business & Economics
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Vilnius University
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