In Taiwan, as in countries around the world, cigarettes and alcohol pose many health threats. For instance, habitual smoking and excessive drinking can cause cardiovascular disease, digestive tract disease, hypertension and diabetes; they also increase the incidence of, and mortality from, many types of cancer [1–3]. Furthermore, studies have shown that alcohol abuse commonly leads to driving while intoxicated as well as to violent behavior [4, 5].
In addition to the well-known, detrimental effects of alcohol and cigarettes, a third stimulant – betel nuts – also poses a serious health threat in Taiwan. Betel nut use has long flourished throughout Asia [6–9]. In fact, it is estimated that roughly 10%-20% of the world's population uses it [10, 11]. This means that betel nut consumption ranks fourth (behind cigarettes, alcoholic beverages, and coffee) on the list of the world's most widely used central nervous system stimulants [12, 13]. In 2002, Taiwan's Bureau of Health Promotion took a nationwide survey and found that 17% of men and 1.2% of women habitually chew it [14].
Betel nut use is closely correlated with oral diseases, such as mouth cancer and fibrosis of the oral mucosa [15]. In Taiwan, deaths from oral cancer increased four-fold (from 349 to 1439) in the 15-year period between 1986 and 2001, and the age-adjusted mortality rate more than doubled from 4.56 per 100,000 to 11.42 in the same time period. Oral cancer has now become the fifth-most prevalent cancer among Taiwanese males [16]. As a result of these and similar experiences around the world, the international medical community now believes that betel nuts are carcinogenic [17].
Individuals who simultaneously smoke, chew betel nuts, and drink alcohol are approximately 123 times more likely to develop oral, pharyngeal, and laryngeal cancer than are those who do not [15]. Unsurprisingly, many of the world's countries now consider control of the use and abuse of tobacco, alcohol, and betel nut as three of their major health priorities.
Cigarette consumption
The price of cigarettes in Taiwan is much lower than in many other countries, which has long made it difficult to significantly reduce the smoking population. If we take the average amount of work needed to purchase a pack of cigarettes as a proxy for cigarette purchasing power, then it would take an Indian 77 minutes of work, an Indonesian 62 minutes, a Chinese 56 minutes, and a Taiwanese only 7–10 minutes to purchase a pack of domestic cigarettes. In 2002, the country had more than 4.5 million smokers, which implies that one out of every three adults is a smoker [18].
Apart from the direct toll that smoking takes in sickness and loss of life, it is estimated that health problems derived from it add approximately NT$20 billion annually to Taiwan's health insurance costs. It is also estimated that smoking reduced the GDP by more than US$1.032 billion in 2000[19].
Raising taxes on cigarettes is currently one of the most effective and widely-used policies with which governments around the world control tobacco use [20–24]. The World Health Organization (WHO) has also proposed the use of taxes and other control measures to lower the consumption of tobacco [25]. The government of Taiwan took the first steps to adopt such a taxation policy in 1987 when it imposed an in-kind tax on cigarettes that increased the price by NT$16.6 per pack [26]. After joining the World Trade Organization (WTO) in 2002, Taiwan imposed the Wine and Tobacco Tax Act, which added an excise tax of NT$11.8 per pack. The act also included an additional Health & Welfare tax of NT$5 per pack.
Prior to this act, the price of cigarettes in Taiwan had remained constant for many years. Following its implementation, however, the price of domestic cigarettes rose by close to 30%, and the price of a pack of cigarettes rose by roughly NT$10 to an average of approximately NT$45. This jump in cigarette prices caused consumption to fall from 2.31 billion packs in 2001 to 1.735 billion packs in 2002 [27]. The prevalence of smoking likewise fell – from 24.74% in 2001 to 23.53% in 2002; it fell again in 2003 to 22.84%. This indicates that cigarette price increases do indeed reduce both cigarette consumption and the prevalence of smoking [28]. In 2006, the government increased the health tax on cigarettes from NT$5 to NT$10.
Alcohol and betel nut taxes
In addition to levying taxes on tobacco, Taiwan also taxes alcoholic beverages. Each liter of beer is subject to a tax of NT$26, and each liter of distilled liquor is subject to a tax of NT$185. Depending on alcohol content, reprocessed alcoholic beverages are taxed NT$7 per each percent of alcohol when the alcohol content is less than 20% by volume and NT$185 per liter when the alcohol content is over 20%.
It should be noted that no health tax has yet been imposed on either alcohol or betel nuts. Furthermore, no excise tax has yet been imposed on betel nuts.
Consumption trends of both betel nuts and alcoholic beverages
Prior to 1987, consumption of betel nuts was negligible. However, between 1987 and 2001, the average retail price of betel nuts fell approximately 13.35% due to an oversupply. As a result, domestic consumption rose by 108%, and average annual consumption in 2001 increased to 9.3 kg per person. The number of betel nut users likewise rose significantly. For example, in the southern counties of Taiwan, 9.8% of all adults and 22.5% of smokers, respectively, consumed betel nuts prior to 1987. By 2001, the rates had risen to 17.0% and 31.3% [29].
Consumption patterns of alcoholic beverages have also changed over the last decade. The average retail price of alcoholic beverages fell during the period of 1996–2001, while the consumption of alcoholic beverages remained flat, with average consumption staying at approximately 43 liters per person in 2001. As the price of alcoholic beverages fell, the prevalence of drinking rose. Among citizens over 15 years of age, 34% of men and 23% of women drank alcoholic beverages in 2002 [30, 31].
The goals of this study
Over the last two decades, the government of Taiwan has attempted to discourage the consumption of cigarettes by imposing a series of taxes; in addition, discouraging consumption of betel nuts has now become one of its major health goals [32]. To assist in this effort, we began this study by posing two questions: 1) Will the imposition of an NT$10 health tax on cigarettes effectively reduce cigarette consumption; and 2) Will this tax on cigarettes also lower consumption of alcoholic beverages and betel nuts?
Our questions are based on the premise that smoking, drinking, and chewing betel nuts are different types of consumer behavior; in physiological terms, alcohol and betel nuts are not as addictive as the nicotine found in tobacco. Yet the three habits are linked together because many people who consume one product also consume the others. Specifically, this study assessed the effect of the NT$10 health tax imposed on each pack of cigarettes in 2006 on cigarette, betel nut, and alcoholic beverage consumption using the inherent price elasticity and the cross price elasticities of cigarettes-betel nuts and cigarettes-alcoholic beverages. The study also sought to assess the cross effect of the health tax on consumption of betel nuts and alcoholic beverages.
The results of this study indicate that the NT$10 health tax will not only reduce cigarette consumption, but it will also reduce betel nut and alcohol consumption. Such results provide an important reference with which to guide future decisions concerning health taxes imposed on cigarettes.
An overview of cross price elasticity
Because of the possible linkage between cigarettes, betel nuts, and alcoholic beverages in consumer decision-making, this study performed the simultaneous estimation of the price elasticity of all three products. Because it used the information contained in the residuals, this approach avoids estimation bias and yields better results than single equations do.
The chief basis for assessing the effect of cigarette taxes on cigarette consumption and on consumption of betel nuts and alcoholic beverages is the inherent price elasticity of cigarettes and the cross price elasticity of cigarette price elasticity relative to betel nuts and of cigarettes relative to alcoholic beverages. Past studies of the inherent price elasticity of cigarettes mostly obtained price elasticity values in the range of -0.5~-1.0 for cigarettes in mid-/low-income countries and -0.25~-0.5 in high-income countries [33]. Most literature on the price elasticity of cigarettes in Taiwan gives figures in the range of -0.5~-1.1. This indicates that cigarette price hikes are more effective at reducing consumption in Taiwan than in higher income countries [34, 35].
Literature on the cross price elasticity of cigarettes suggests that the cross price elasticities of cigarettes-alcoholic beverages and of cigarettes-betel nuts may be either negative or positive. Friend and Pagano (2005) showed that smokers whose cigarette consumption decreased were significantly less likely to revert to alcohol use than were those whose consumption increased or remained unchanged [36]. Most foreign estimates of the cross price elasticities of cigarettes-alcoholic beverages and cigarettes-betel nuts are in the range of -0.5~1.0 [37–41].