Macroeconomic impact of tobacco taxation in Indonesia

Background: A significant tobacco tax increase has long been advocated to reduce Indonesia's high smoking prevalence. However, implementing such a policy remains challenging due to the tobacco industry's argument that it would negatively impact the economy. Objective: This study aims to provide a comprehensive estimate of the net impact of tobacco taxation on Indonesia's economy. Method: The impact of the tax hike on the economy is simulated through a change in cigarette demand and reallocation of household's budget and allocation government spending from additional tobacco tax revenue. Input-output analysis is employed to estimate the net effect of the tobacco tax rise on the total economic output, income and employment in Indonesia. Finding: Increasing the tobacco tax would generate a net positive impact on the economy as it would increase economic output, household income and employment. The positive impact is mainly driven by government spending from additional revenue from increased tobacco taxes. Spending tax revenue using the current structure of government spending has the potential to generate the optimal economic effect. Increasing tobacco tax by 45% from the 2019 tax level would increase economic output, household income and employment by Rp84.2 trillion, Rp24.1 trillion and 400.3 thousand jobs, respectively.