OBJECTIVE: Estimate price and income elasticities of aggregate demand for cigarettes in Colombia, by controlling for structural market changes since the late 1990s, to identify policy opportunities for taxes that could improve public health and increase tax revenues. METHODS: Measurement of aggregate demand for cigarettes using gross income reported on value-added tax returns submitted to Colombia's National Tax and Customs Office (DIAN is the acronym in Spanish) by the tobacco product manufacturing industry, subtracting exports. A quarterly time series was obtained for the period 1994-2014. The econometric estimation using two-stage least squares controls for price endogeneity and uses a set of dummy variables to control for structural changes in the market and in its regulation. RESULTS: Demand is, from a statistical standpoint, sensitive to price and to income. Price elasticity of demand is -0.78 and income elasticity is 0.61. CONCLUSIONS: Inelastic demand implies that it is possible, through cigarette excise taxes, to meet public health targets and increase revenues simultaneously. The results also suggest that the considerable increase in household income in Colombia in the first decade of the 21st century increased purchasing power, which, lacking an accompanying tax increase, promoted cigarette consumption, with negative effects on public health, and wasted an opportunity to increase tax revenues.
OBJECTIVE: Estimate price and income elasticities of aggregate demand for cigarettes in Colombia, by controlling for structural market changes since the late 1990s, to identify policy opportunities for taxes that could improve public health and increase tax revenues. METHODS: Measurement of aggregate demand for cigarettes using gross income reported on value-added tax returns submitted to Colombia's National Tax and Customs Office (DIAN is the acronym in Spanish) by the tobacco product manufacturing industry, subtracting exports. A quarterly time series was obtained for the period 1994-2014. The econometric estimation using two-stage least squares controls for price endogeneity and uses a set of dummy variables to control for structural changes in the market and in its regulation. RESULTS: Demand is, from a statistical standpoint, sensitive to price and to income. Price elasticity of demand is -0.78 and income elasticity is 0.61. CONCLUSIONS: Inelastic demand implies that it is possible, through cigarette excise taxes, to meet public health targets and increase revenues simultaneously. The results also suggest that the considerable increase in household income in Colombia in the first decade of the 21st century increased purchasing power, which, lacking an accompanying tax increase, promoted cigarette consumption, with negative effects on public health, and wasted an opportunity to increase tax revenues.