Philippines Urged to Align Tobacco Taxation with Revenue-Maximizing Rate, Economist Warns

 

The Philippines should realign its tobacco tax rates closer to the revenue-maximizing level, as further increases could lead to greater revenue losses, according to Dr. Arthur Laffer, founder and chairman of Laffer Associates.

“Doubling down with further revenue-losing tax rate increases is never a sensible solution to a tax revenue loss,” Laffer emphasized. He explained that the Philippines’ continuous tax hikes on tobacco have surpassed the revenue-maximizing point, resulting in reduced collections.

The Laffer Curve and Declining Revenues

Laffer, widely known for the Laffer Curve theory, pointed to the country’s declining tobacco tax revenues as evidence of the curve’s principles in action. The Laffer Curve illustrates the relationship between tax rates and revenue, where increasing tax rates initially boost revenues but, beyond a certain point, cause them to decline as the tax burden stifles consumption or drives illicit trade.

Under the Tobacco Tax Law of 2019 (Republic Act No. 11346), the excise tax on cigarettes rose to PHP 50 per pack in 2021, with an annual 5% increase. The current rate stands at PHP 63 per pack. Vapor products are taxed at PHP 54.60 per milliliter for nicotine salt and PHP 63 per 10 milliliters for freebase nicotine.

Laffer explained the dual effects of tax rate changes:

• Arithmetic Effect: Higher rates increase the tax per unit but may reduce overall revenue if they suppress consumption.
• Economic Effect: Excessive rates can discourage economic activity, reduce employment, and shrink the tax base.

He further noted the role of price elasticity. For elastic demand, where consumers are highly sensitive to price changes, the revenue-maximizing tax rate is lower. For inelastic demand, it can be higher.

Risks of Over-Taxation

Laffer warned that excessive taxation has contributed to reduced consumption and a surge in the illicit trade of tobacco products. “When a commodity becomes too expensive due to taxation, consumers either reduce consumption or turn to illicit goods,” he said.

While commending the Philippines for streamlining its tobacco tax system, Laffer criticized the mechanism of automatic annual rate increases, which he argued has pushed rates beyond the optimal point. “It’s time to reevaluate the cigarette tax rate to address declining revenues and curb illicit trade,” he said.

 

Recommendations for Reform

Laffer also highlighted the need to simplify the taxation system for e-cigarettes, which currently operates under a two-tiered structure. He proposed a uniform rate for e-cigarettes, similar to other tobacco and nicotine products, to address enforcement challenges.

In addition to tobacco tax reforms, Laffer suggested broader fiscal strategies to bolster revenue collection. These include simplifying regulations for capital markets and rationalizing the fiscal regime for the mining sector.

“By coupling tax base expansion with modest tax rate decreases, the Philippines can diversify revenue sources while minimizing economic harm. This balanced approach would ensure sustainable fiscal health and economic growth,” Laffer concluded.


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