Tobacco Economics in Indonesia [downloadable]
Penulis : Sarah Barber, Sri Moertiningsih Adioetomo, Abdillah Ahsan, Diahhadi Setyonaluri
Low real cigarette prices, population growth, rising household incomes, and mechanization of the kretek industry have contributed to sharp increases in tobacco consumption in Indonesia since the 1970s. The majority of tobacco users are smokers, and the vast majority of smokers (88 percent) use kreteks, or cigarettes made of tobacco and cloves. Smoking prevalence is 34 percent, and 63 percent of men smoke. Per capita adult tobacco consumption increased by 9.2 percent between 2001 and 2004. Given the delay of up to 25 years between the time of smoking uptake and the onset of many chronic diseases, the negative health effects of increases in cigarette consumption are being seen only now. Up to one-half of today’s 57 million smokers in Indonesia will die of tobacco-related illnesses.
The customs law states that excise should be used to reduce consumption of tobacco products and control their distribution because they are unhealthy. In practice, the primary factor taken into consideration when setting the tobacco tax rate is the annual revenue target. The system continues to promote gaps in prices between products, tobacco has become more affordable over time, and smoking prevalence among children has increased sharply. Cigarette prices and tax rates in Indonesia are low relative to other countries, and real cigarettes prices have remained stable since the 1980s.
The report concludes with five recommendations. First, the tobacco excise system should be simplified by eliminating the production tiers, applying a uniform specific tax, implementing tax increases across all products, and automatically adjusting the specific tax for inflation. Specific excises that impose the same tax per cigarette are more effective in discouraging cigarette consumption. Tax increases that aim to reduce consumption need to be higher than the general rate of inflation and large enough to offset income growth. Second, the maximum legally allowable excise tax rate for all tobacco products should be applied to reverse the trend of increasing cigarette affordability and to start to address the significant burden of tobacco-related illnesses. Tax levels that achieve the global benchmark of 70 percent through a specific, or primarily specific rather than ad valorem, tax would have the greatest health impact. Third, the employment generation goal of the tobacco tax system should be re-examined to determine whether other programs or policies would be more effective in promoting employment. Fourth, the tax rates should be set at a level to correct for market failures related to lack of information and addiction, and to reflect the true costs of smoking to individuals and society. Lastly, it is recommended that the 2 percent earmarked excises be used effectively to support local economies that could be negatively affected by reductions in tobacco consumption, and to implement tobacco control programs more broadly.
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