World Customs Journal. Volume 10, Number 1 97.2016
Ade Hidayat and Nasruddin Djoko Surjono
Abstract : This study estimates the impact of excise tariff simplification on cigarette consumption and government revenue. In addition, the study compares the ‘simplification’ case with the ‘no simplification’ case. Several estimation models using unbalanced and sub-balanced panel data, random effect maximum likelihood estimation (MLE) and panel-corrected standard errors (PCSE) are explored to estimate the impact. The results indicate that tariff simplification has a greater impact on raising cigarette prices, reducing consumption, and increasing government revenue than regularly increased excise rates. The greatest impact can be seen in cigarettes produced by large companies and white cigarette machine-made product. The results also suggest that cigarette excise taxes are ‘under-shifted’ to consumers and that producers bear some of the tax burden.
Conclusions Based on the above analyses, the following conclusions can be made:
1. Simplification of a specific excise (tax) rate has a higher impact on raising the prices than the usual rate increase.
2. Increasing the specific excise has the greatest effect in raising prices on tobacco products produced by large manufacturers. The large manufacturers group (Group I/Gol I) is a group of manufacturers that have a production capacity exceeding 2 billion cigarettes per year.
3. The empirical model on tax incidence analysis shows under-shifting, where producers tend to raise prices under the tax increase. This means that producers bear most of the burden of excise.
4. The level of cigarette consumption due to cigarette prices affected by simplification is generally smaller than the consumption of cigarettes which do not undergo simplification of excise rate.
5. Simplification of the tariff structure significantly raises the price and reduces the consumption of White Cigarettes Machine Made (SPM), while it has no effect on consumption of Clove Cigarettes Hand Made (SKT) and even raises this kind of cigarette consumption, likely due to SPM consumers ‘switching’ to this cheaper category of product. SKT is a unique Indonesian tobacco product.
6. Demand for three types of cigarettes—SKM, SKT and STF—is inelastic so it is appropriate to apply the high excise rate to optimise the government revenue from the tax.
7. Simplification of the tariff structure generally has a greater impact on revenue increase than nonsimplification.
Djokonomics 