A Study on China’s Tobacco Taxation and Its Influencing Factor on Economic Growth
A Study on China’s Tobacco Taxation and Its Influencing Factor on Economic Growth
Tobacco is a significant product providing considerable economic benefits to countries worldwide, while its increased consumption causes health and socio-economic losses for smokers and non-smokers. This paper constructs a decomposition system of tobacco taxation: the population aging factor is included in the influencing factors of personal tax, and personal tax revenue is regarded as the product of tax structure, macro tax burden, regional economy, reciprocal aging, and the elderly population. This article conducts an empirical study on the relationship between taxation and economic growth. The estimated coefficients of business tax and corporate income tax are significant at the significance level of 0.1, with a consumption tax and time-variable coefficients reporting a 0.02 level of significance. The T statistic value and the explanatory degree of the variables involved in the model to the explained variables are also very high, reaching more than 95%. We find that increasing the macro tax burden negatively impacts economic growth. Therefore, the study suggests that for fostering the industry’s economic growth, the country needs to ensure the optimal macro tax burden of 17.5%, with different types of taxes influencing economic growth. Personal tax reform should pay attention to the phenomenon of aging, adjust the tax structure to increase personal tax income, provide policy support and guarantee for the elderly labor force, and encourage the re-employment of silver-haired people to alleviate the adverse impact of aging on taxation.
Tobacco is a particular product. Compared with ordinary commodities, because its ingredients contain nicotine, smokers are easily addicted and become dependent on tobacco, resulting in lower elasticity of demand for tobacco products. In addition, its consumption behavior also has incomplete information, which will cause negative externalities and pathogenicity in the consumption process. Compared with drugs, tobacco is addictive and causes less health damage, and the symptoms after addiction are controllable. Therefore, all countries have adopted an attitude of “restricting tobacco use.” This has led to such a result: on the one hand, tobacco production can bring huge economic benefits to society and the government; on the other hand, tobacco consumption will lead to immeasurable socio-economic loss.
Under the background that tobacco consumption has become a huge threat to global health, raising tobacco excise tax has been proven by international practice as the most effective and cost-effective tobacco control method. This is because, compared with other tobacco control measures, taxation has a wider scope and raises huge financial revenue for the government while effectively controlling tobacco.
With the in-depth research of domestic and foreign experts and scholars on tobacco consumption, policy suggestions for the reform of tobacco tax are also constantly put forward. Through induction and sorting, it is found that scholars mostly focus on empirical analysis, studying the elasticity of consumer demand for tobacco, the impact of tobacco tax increases on tobacco consumption, and estimating the direct and indirect costs caused by smoking—however, few studies on the overall system design of tobacco excise tax.
Therefore, based on previous scholars’ research, this paper intends to study the specific design of each tax system element of tobacco consumption tax from the perspective of tax system optimization through the combination of qualitative and quantitative research methods, inductive analysis, and comparative analysis. From the perspective of theoretical construction, this paper has certain theoretical significance for making up for the relevant deficiencies and improving the entire taxation theoretical system.
The mechanism of the optimization of the tobacco consumption tax system is mainly carried out from two perspectives: how to achieve the tobacco control target of the tobacco consumption tax and how the tax system elements are designed to achieve the tobacco control target. The analysis of the former’s taxation goal provides an optimization direction for the design of tax system elements. In contrast, the latter’s discussion guarantees the realization of the former’s taxation goal. At the national level, we decompose the personal income tax income of the total tobacco company employees. The results of the LMDI decomposition show that the aging effect has an eroding effect on the individual tax income, which seriously hinders the growth and development of the individual tax income and often causes the individual tax income. The negative growth of the company partially offsets the driving effect of other effects on personal tax revenue. Although there are differences in the contribution rate of the various decomposition effects between regions to the total effect, economic effects are always the main reason for the growth of individual taxes in each region.
Tax structure and the macro tax burden also determine how individual tax revenues grow. There is a significant gap between China’s tax structure, macro tax burden, and international levels. Policymakers should also focus on these two factors when making decisions on individual tax reform. The number of elderly practitioners continues to increase, and the expansion of the elderly population has also contributed to the increase in personal tax revenue. Perhaps policy support in elderly employment can also alleviate the tax pressure caused by aging. We analyze and study the impact of Chinese taxation on economic growth by empirically testing the impact of different taxes or tax types on economic growth. Value-added tax, consumption tax, and personal income tax for tobacco company employees have a negative impact on China’s per capita GDP; business tax and corporate income tax have a positive impact on China’s per capita GDP.
The rest of this paper is organized as follows. Section “Study Background” discusses the research background. Section “Mechanism Analysis of Optimization of Tobacco Consumption Tax System” analyzes the mechanism of tobacco excise tax optimization. Section “Lmdi Decomposition of Personal Income Tax for Tobacco Company Employees With the Introduction of Population Aging Factors” analyzes the personal income tax of tobacco company employees by introducing population aging factors. Section “Empirical Test of the Impact of Tobacco Tax Structure on Economic Growth” empirically examines the impact of tobacco tax structure on economic growth, with Section “Conclusion” concluding the research findings by proposing significant implications for future researchers.
From the perspective of tax burden shifting and ultimate fate, the research results of related scholars pointed out that tobacco consumption accounts for a relatively high proportion of the total consumption of low-income people, which is common in all countries in the world. If the tobacco consumption tax is increased, the burden of the tobacco consumption tax will be increased. Retirement will also increase, which is a departure from the principle of tax fairness. Researchers believe that although tobacco consumption is harmful to physical and mental health, tobacco products are addictive, and their price elasticity is small. The increase in tax burden can be effectively transferred to consumers, thus playing a role in restraining tobacco consumption (Guo and Quan, 2020).
China’s cigarette price system includes four major parts: ex-factory price, transfer price (tax-calculated price), wholesale price, and retail price. The transfer price is the tax base of the China Tobacco Consumption Tax. It refers to the cigarette transaction price signed between the cigarette manufacturer and the purchaser in the production process. This price is the basis of the ex-factory price, determined by the State Tobacco Monopoly Administration and the tax Jointly decided by the agencies. The wholesale price is the price formed after adding a specific adjustment gross profit rate (the profit rate between the cigarette adjustment price and the wholesale price) based on the allocation price. Finally, the retail price of cigarettes is based on the wholesale price plus the prescribed gross margin (the profit margin between the wholesale price and the retail price of cigarettes). The State Tobacco Monopoly Administration regulates the adjusted gross margin and the gross margin.
Because the high-income group and the group with high tobacco addiction have less elastic demand for tobacco, the affordability of tobacco is higher, or the consumption habits are relatively stable, the product substitution caused by the increase of tobacco consumption tax is not high, and the consumption volume has remained stable. Even for high-income earners, due to the basic national conditions of China’s social “respect for tobacco” and “send tobacco,” the increase in tobacco prices may also promote their purchase of high-end tobacco. On the other hand, for low-income earners and groups with small addictions, although tobacco consumption has decreased, the unit price increase brought about by tax increases can make up for the fiscal revenue loss caused by the decrease in tobacco sales.
As shown in Figure 1, based on ensuring that the increased tax revenue passed to the final retail price, that is, based on the tax price linkage, the method of raising taxes on tobacco products reasonably is not only in line to control tobacco consumption, but also meeting the goal of stabilizing fiscal revenue. Therefore, this factor ultimately maximizes social welfare.
Figure 1. Conceptual framework diagram of the impact of raising the tobacco excise tax on tobacco consumption and government revenue.
Mechanism Analysis of Optimization of Tobacco Excise Tax System Elements
Over the years, China has potentially focused on increasing its production level (Mohsin et al., 2021) rather than the consumption pattern. Consumption tax is an important economic means of national macro-control. The determination of its taxation scope reflects the tax policy and guiding ideology of a country or region in a specific period and directly affects the changes in related consumer behavior. For tobacco consumption tax, the scope of its collection should also be updated and adjusted in a special period. China’s current tobacco consumption tax collection design only imposes consumption tax on three types of traditional tobacco products: cigarettes, cigars, and cut tobacco. The alternative products of cigarettes, namely new tobacco products, have not yet been included in the tax collection and management system. Under the current background of levying taxes on traditional cigarettes, if new tobacco products such as e-cigarettes are not taxed, smokers will eventually switch to the field of e-cigarettes based on the income effect and substitution effect, which will not only affect the high value of traditional tobacco products. Taxation has an impact and runs counter to the heavy taxation goal of tobacco control.
The collection of cigarette excise tax includes three links, namely, production, wholesale, and retail. Since China implements a tobacco monopoly system, this article only demonstrates the advantages and disadvantages of the three links in this context. Before comparing the various collection links, we must understand the specific operation of the tobacco industry. The process of the tobacco industry is shown in Figure 2.
As far as the production link is concerned, the current tobacco consumption tax in most countries globally is levied in this link, and China initially implemented a single levy on the production link. This is because most tobacco production companies are general taxpayers, and tax authorities can control them through a series of methods such as input tax, output tax, and equipment capacity. Hence, it is easy to obtain relevant tax data. Tobacco companies have strong control and can obtain higher tax revenues at extremely low taxation costs; taxation at the source is more efficient.
However, behind the theory of efficient collection of production links, there is a problem of local protectionism in collecting tobacco taxes in practice. Although the consumption tax belongs to the central government’s fiscal revenue and will eventually be paid to the state, because the consumption tax is levied at the place of production, the urban maintenance and construction tax and education surcharge calculated with the consumption tax as the tax base belongs to the local tax revenue. In addition, according to the tax refund calculation formula determined by the tax-sharing system, the huge tobacco consumption tax levied at the production area constitutes one of the bases of the central tax refund. Therefore, before these two “preferential policies,” on the one hand, local governments that mainly produce cigarettes will increase measures to encourage and protect the development of local cigarette manufacturers from obtaining high fiscal revenue. When producing cigarettes, local governments will choose to deny them access to the local market for fiscal revenue, which will result in market separation and form a local monopoly in cigarette production.
In summary, levying a cigarette excise tax only in the production process runs counter to the country’s total tobacco production capacity restriction goal and restricts healthy competition in the cigarette market. This situation is particularly prominent in provinces that rely heavily on tobacco tax revenue. The optimization framework diagram of the tobacco consumption tax system is shown in Figure 3.
LMDI Decomposition of Personal Income Tax for Tobacco Company Employees With the Introduction of Population Aging Factors
Decomposition of LMDI of Tobacco Company Employees’ Personal Income Tax Under the Factor of Population Aging
The additive decomposition component of each factor means that other factors remain unchanged, only the incremental change in the total personal tax income caused by the change of the factor. The multiplicative decomposition formula of individual income tax income of tobacco company employees is as follows:
LMDI Decomposition Results of Changes in Personal Income Tax Income of Tobacco Company Employees
Regional macroeconomic conditions and development levels are different. How will the personal income tax income of employees of tobacco companies in China change? When other factors are fixed, what impact does the national tax structure, macro tax burden, regional economy, aging, and the size of the elderly population have on personal tax revenue? This article will discuss this issue in detail. The individual income tax of employees of tobacco companies across the country can be regarded as a summary of individual tax income at the regional level.
Analyzing Table 1 shows that China’s total personal tax revenue has increased year by year. From 2008 to 2020, personal tax revenue has increased by 589.725.8 billion yuan. It has a driving effect, among which the economic effect is the most significant. The increase in personal tax revenue caused by the economic effect is 413.74 billion yuan, far exceeding the driving effect of the other three effects. China’s tax structure and macro tax burden increased only slightly. From 2008 to 2020, the proportion of individual tax revenue to total revenue increased by 0.31%. At the same time, the ratio of tax revenue to total output also rose slightly, increasing by 3.4%, respectively. It caused an increase of 21.26 billion yuan and 90.57 billion yuan in personal tax revenue.
Table 1. Decomposition results of national individual tax revenue increment.
The scale effect of the elderly population has also actively promoted the growth of individual tax income. From 2008 to 2020, China’s elderly population has increased by 37 million, and the population effect has led to an increase of 119.61 billion yuan in individual tax income. The reason may be due to the rich human resources of the elderly in China. According to the “Survey Report on the Living Conditions of the Elderly in Urban and Rural Areas in China,” the number of working elderlies in China has increased rapidly since 1990. In 1995, the number of working people over 60 in China was 60.648 million. In 2019, this indicator increased to 92.353 million. In the same year, the working population aged 65 and above also increased by 13.954 million, an increase of 114% during the period.
Between 2008 and 2020, the ratio of China’s total population to the elderly declined, from 11.62 to 9.15, a decrease of 2.46, and the aging degree increased by 2.26% compared to 2008, which significantly hindered the growth of individual tax income. This reduced personal tax revenue by 55.55 billion yuan. Changes in the reciprocal of aging will bring about changes in tax revenue in the same direction. For the sake of brevity, the following are collectively referred to as aging effects.
Analyzing the decomposition results of individual tax revenue in each year shows that changes in the tax structure, macro tax burden, regional economy, and the size of the elderly population will bring changes in the same direction of tax revenue, and changes in the aging effect will change in the opposite direction of tax revenue. Taking the data from 2008 to 2011 as an example, China’s tax structure has been reduced year by year, and the ratio of individual tax revenue to total tax revenue has decreased year by year. This change has caused a negative growth in individual tax revenue. The change in tax structure in 2011 has reduced individual tax revenue by 14.16 billion yuan. In the same year, the macro tax burden increased by 1.87% compared with the previous year, which led to an increase of 34.39 billion yuan in personal tax revenue. The economic effect also contributed to an increase of 29.97 billion yuan in personal tax revenue. In the same year, the degree of aging increased compared with the previous year. The increase from 9.32 to 9.49% caused a decrease of 161 million yuan in personal tax revenue. Data from other years can also support this conclusion. The LMDI decomposition of the development speed of national personal tax revenue is shown in Table 2.
Table 2. Decomposition results of the development speed of national personal tax revenue.
Analyzing Table 2 shows that the growth rate of individual tax revenue has maintained above 10%. In 2011, the individual tax revenue growth rate was 1.34, and the growth rate reached more than 20%. The development momentum is good. From 2008 to 2020, the national personal tax revenue development rate will be 4.51, slightly lower than the eastern region’s personal tax development indicator. The economic effect caused the growth rate of personal tax revenue to be 182.1%, and the stimulating effect of the size of the elderly population on the personal tax revenue was the second, which caused the growth rate of personal tax revenue to be 36%. The pulling effect of the tax is relatively small, driving the growth rate of personal tax income to 5.6 and 25.7%, respectively. The aging effect affects the development rate of personal tax to 0.89, which means that the deepening of aging has caused a negative growth rate of 13% in personal tax revenue, which seriously hinders the development level of personal tax.
The decomposition of each year also shows that China’s tax structure and macro tax burden fluctuate year by year, and there is no stable trend. The two major fiscal effects on the promotion or suppression of individual tax revenue cannot be generalized. Their role depends on these two influencing factors. China’s economic growth is in good shape, and the economic effects continue to promote the growth of personal tax revenue. In 2014, the growth rate of personal tax revenue reached 9.5%, and the growth rate of personal tax revenue caused by the decline in the size of the elderly population was −8.2%. The deepening of the aging degree inhibits the growth and development of personal tax income. The annual decomposition results show that the degree of aging will cause a negative growth rate of personal tax income.
Empirical Test of the Impact of Tobacco Tax Structure on Economic Growth
This article will use the relevant data of a particular year as the analysis sample to estimate the above model. Because observing the macro tax rate during this period, it can be found that the tax rate is basically above 30%, with an average of about 37%. The economic system has undergone tremendous changes, and the tax system has also undergone new changes. Therefore, the macro tax rate has been directly reduced to about 20%. With the implementation of the tax-sharing system, the tax system has gradually improved and entered a stable stage. Therefore, this paper will use the data since the tax-sharing system as a sample for statistical analysis, which can better reflect the impact of taxation on economic growth.
This article will select five major taxes, namely value-added tax, business tax, corporate income tax, personal income tax for tobacco company employees, and consumption tax as explanatory variables. The control variable is set as China’s total investment. Generally speaking, a country’s GDP growth is driven by the troika of consumption, investment, and import and export. According to China’s current situation, imports and export are relatively small, and the consumption capacity needs to be improved. Investment is mainly used to drive GDP growth. And investment can be divided into inventory investment and social fixed asset investment. Since the investment in fixed assets of the whole society is the most favorable means of stimulating China’s economic growth, we will use the fixed asset investment data to replace the investment here. The explained variable is the per capita GDP value. In addition to the introduced control variable of total investment, we will introduce time t because the data designed by our model are all-time series, and we must consider the impact of time on the results. To eliminate the price impact, all explanatory variables, explained variables, and control variables used here will be calculated using actual price data, the real GDP per capita after the price factor is proposed. Finally, we will do a natural logarithm of all variables to prevent the occurrence of heteroscedasticity. Therefore, we set the specific regression model equation as follows:
Before performing the unit root test, it is necessary to determine the form of the variable. Usually, it is necessary to determine which form the variable belongs to by drawing the curve graph of the sequence. If the graph of a variable appears to fluctuate with a zero value, then the test type for this variable can be determined to have no intercept term and no time trend. A variable can be defined as having an intercept term if the variable’s graph appears to fluctuate from zero without a clear time trend. If the variable graph shows a clear trend in one direction over time, then the variable can be identified as a test type containing both an intercept term and a time trend term.
Figure 7. Correlation coefficient and standard deviation of each variable.
Figure 8. The regression results of the T statistic and F statistic of each variable of the model.
The residual of the model is a stationary series, indicating that there is indeed a certain cointegration relationship between these unstable variables. According to the T statistic value of each variable, it can be seen that in the coefficients of the entire estimation equation, the estimated coefficient of the variable of fixed asset investment in the whole society is not significant, and the estimated coefficients of business tax and corporate income tax are both significant at the significance level of 0.1. The estimated coefficients of value-added tax and employee personal income tax of tobacco companies are significant at the significance level of 0.05. The coefficients of the constant term, consumption tax, and time-variable are all significant at the significance level of 0.02. These insignificant and non-significant variables may be caused by too many variables in the model design and insufficient sample data length. However, in general, the regression results of the model are still more significant. The T statistic value is very high, and the explanatory degree of the variables involved in the model is also very high, reaching more than 95%. Therefore, the overall fit of this regression equation is still very good.
And how to adjust the proportion of direct tax and indirect tax, on the one hand, we can increase the tax types of the income tax system by levying some new taxes such as social security tax, inheritance tax, gift tax, etc.; on the other hand, we must look at the solution to the problem from an overall perspective, that is, to achieve through increments, to convert a part of my country’s non-tax government revenue into direct tax in a certain way. Those who are divided equally can better contribute to economic growth.
This paper constructs a composite index of individual income tax for tobacco company employees through the reasonable division of individual tax income. It uses the LMDI decomposition method to decompose the incremental decomposition and development speed decomposition of individual tax income from the national and regional levels. Whether it is the decomposition of the eastern, central, western, and northeastern regions, or the decomposition results from the country’s overall level, they all indicate that the aging effect is the main reason for hindering tax revenue. The decomposition results are specifically reflected in the fact that the aging of each region or country is increasing, the amount of change in tax revenue caused by aging is negative, the development speed indicator is less than 1, and a negative growth rate has occurred. The changes in tax structure and macro tax burden during the sample observation period do not have a definite trend but fluctuate up and down. The fluctuation of these two effects will cause changes in the same direction as the individual tax revenue. The specific manifestations are tax structure and macro tax.
Negative effects have a two-way effect on changes in personal tax revenue. The growth of tax structure and the macro tax burden will drive the growth of personal tax revenue, and the reduction of tax structure and the macro tax burden will hinder the growth of personal tax revenue. Through empirical analysis of the impact of different taxes on economic growth, we find that value-added tax, consumption tax, and personal income tax of tobacco company employees have a negative impact on China’s per capita GDP. It has a restraining effect on economic growth, with business tax and corporate income tax impacting China’s per capita GDP. Indeed, it is positive, which is conducive to China’s economic growth. The effect of value-added tax on economic growth is inseparable from the narrow scope of China’s value-added tax collection. The collection of corporate income tax can promote economic growth. Certain aspects are also affected by China’s actual economic conditions. The existence of tax collection methods, tax rates, and tax evasion does not fully reflect the original intention of narrowing the income gap. Therefore, it has a negative impact on China’s economic growth.
This paper mainly studies the impact of taxation on economic growth from the two aspects of macro tax burden and tax structure. It adopts medium-caliber macro tax burden data in the aspect of the macro tax burden. At the same time, the price level of GDP, the added value of per capita GDP, and time are used as control variables for analysis. In terms of tax structure, value-added tax, business tax, consumption tax, corporate income tax, and personal income tax are used as explanatory variables, and the total investment in fixed assets and time series of the whole society are used as control variables to analyze and study the impact of different taxes on economic growth. However, as far as the impact of taxation on economic growth is concerned, further research can be done from the regional composition of taxation amount to find out the different effects of taxation on economic growth in different regions, and then formulate different policies according to the impact of different regions. Therefore, this will also be the direction of further research in this paper in the future.
Publicly available datasets were analyzed in this study. The data is publicly available on China National Knowledge Infrastructure (CNKI). https://data.cnki.net/.
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Keywords: economic growth, population aging factor, logarithmic average weight decomposition method, sustainability, health psychology