Firms' performance under a different cigarette tax system: Empirical evidence from indonesian cigarette manufacturing firms

Vid Adrison, Windhiarso Putranto

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

In an imperfect market, a percentage tax increase in an ad valorem system results in a smaller price increase and lower profits than under a specific regime, unless firms undertake a joint-profit maximization strategy using the ad valorem tax system. In this study, we analyze the effect of a price increase on the firms' performance under three different cigarette tax regimes in Indonesia, namely ad valorem tax, mixed tax, and specific tax. Using data from 2002 to 2013, we find that a percentage rise in the cigarette price increases the nominal profit across all three tax systems. However, the effect of price on the nominal profit is statistically indifferent in all three regimes. Using markup (i.e., the ratio of profit-to-cost) and profit margin (i.e., the ratio of profit-to-sales) as alternative measures of performance, we find that a percentage price increase reduces the firms' markup and profit margin. The reduction in markup and profit margin under an ad valorem tax is larger than the other two tax systems. For a product with an inelastic demand, a reduction in markup under a specific tax indicates the existence of tax under-shifting, which is likely to occur with the absence of minimum price regulations.

Original languageEnglish
Pages (from-to)83-98
Number of pages16
JournalInternational Journal of Economics and Management
Volume12
Issue number1
Publication statusPublished - 1 Jan 2018

Keywords

  • Ad valorem tax
  • Cigarette taxation
  • Firm profit
  • Specific tax
  • Tax shifting

Fingerprint Dive into the research topics of 'Firms' performance under a different cigarette tax system: Empirical evidence from indonesian cigarette manufacturing firms'. Together they form a unique fingerprint.

  • Cite this