- Corporate tax inversions have increased as companies seek to avoid high U.S. corporate tax rates. Unless the tax code is reformed to lower rates and broaden the base, inversions will continue. - The Foreign Account Tax Compliance Act (FATCA) places new reporting requirements on foreign banks with U.S. accounts. Many foreign banks have closed American accounts in response. - The WHO proposes a global tobacco excise tax of at least 70% of retail price. However, economists disagree on the impact and such a high uniform tax may undermine government revenues and increase illicit trade between countries.

1. 103 Murphy Court, Nashville, TN 37203 (615) 460-0100 FAX (615) 460-0102
THROUGH THE LAFFER LENS: POLICY POTPOURRI, PART II
By Nicholas C. Drinkwater, Collette M. Wheeler and Andrew Haley
While there is scant likelihood of any large economic policy changes coming out of Congress prior to the November
elections,
1
that does not preclude existing policy or lesser measures from having a powerful effect on industries and
companies. A number of smaller legislative and regulatory agenda items that will impact profits across the nation are in
place or being contemplated. We will be highlighting some of these policies and their consequences in a series of short
papers over the coming weeks.
Corporate Tax Inversions
A tax maneuver called inversion has been making headlines lately as several large U.S. based companies have taken
advantage of the technique in order to reduce their tax bills. While certainly not a new invention—Congressional Research
Service data show that 76 inversions have taken place since 1983—inversion has become much more popular recently, with
at least 42 inversions taking place since 2008 and a number of deals are currently in the works.
2
Here is a basic description
3
of how an inversion works: A (usually large) company in a high-tax jurisdiction (e.g. the U.S.)
merges with a (usually comparatively small) company in a lower-tax jurisdiction (e.g. Ireland). The deal is structured so that
the smaller, low-tax jurisdiction company acquires the larger, high-tax jurisdiction company. A notable requirement—IRS
code §7874 added as part of the American Jobs Creation Act of 2004—for an inversion to be legal is that the shareholders
of the smaller target company must end up owning at least 20% of the larger inverting company’s shares.
4
Operations and
management often remain in the higher-tax jurisdiction, but the company’s legal headquarters are changed to the lower-tax
jurisdiction.
Inversions have the effect of freeing companies from being forced to hold future foreign earnings offshore. Everyone has
heard about the massive piles of foreign-earned cash sitting around the world because repatriation costs (i.e. paying the U.S.
corporate tax rate on these earnings) are too high to make it profitable. By inverting, a company is no longer a U.S.-based
company and thus is no longer required to pay taxes upon bringing earnings into the U.S., although the company is still
liable for foreign taxes. While in theory the inverted company is supposed to pay taxes to the U.S. if the foreign earnings are
ever repatriated to the U.S.,
5
effectively those taxes are unlikely to ever be paid.
President Obama has made ending inversions a goal of his by the end of this year (or sooner), but an outright ban on the
inversion maneuver is unlikely given that Republicans and many Democrats oppose a ban. Senator Orrin Hatch (R-UT), the
1
“Heard on the Hill: Commentary from the 54th
Washington Conference”, Laffer Associates, June 19, 2014.
2
“New CRS Data: 47 Corporate Inversions in Last Decade,” House Ways and Means Committee Democrats, July 7, 2014.
http://democrats.waysandmeans.house.gov/press-release/new-crs-data-47-corporate-inversions-last-decade-2
3
This is a bare-bones way of describing inversions. In practice, inversions are usually quite complicated. One more advanced way of inverting is
called “Double Irish,” which takes advantage of the different definitions of domicile in the U.S. and Ireland and allows companies to avoid much of the
taxes owed to Ireland in addition to avoiding U.S. taxes. For more on the “Double Irish” structure, see: Vanessa Houlder, Vincent Boland and James
Politi, “Tax Avoidance: The Irish Inversion,” Financial Times, April 29, 2014.
http://www.ft.com/cms/s/2/d9b4fd34-ca3f-11e3-8a31-00144feabdc0.html#axzz38FhX63Au
4
“26 U.S. Code § 7874 - Rules relating to expatriated entities and their foreign parents,” Cornell Law School Legal Information Institute.
http://www.law.cornell.edu/uscode/text/26/7874
5
For more on what inversion does and does not allow companies to do, see: Miles D. White, “Ignoring the Facts on Corporate Inversions,” The Wall
Street Journal, July 17, 2014. http://online.wsj.com/articles/miles-d-white-ignoring-the-facts-on-corporate-inversions-1405638376
Summary
• Corporate tax inversions have been in the news lately as companies look to avoid high U.S. corporate tax rates.
Unless these maneuvers are banned outright, companies will continue to invert as long as the U.S. corporate tax
code remains uncompetitive and arcane on a global scale.
• The Foreign Account Tax Compliance Act (FATCA) recently went into effect, placing strict reporting regulations on
foreign banks with deposits from U.S. citizens and green card holders. Many foreign banks have in turn closed U.S.
citizens’ bank accounts and/or placed higher minimum balance requirements on American-owned accounts.
• The World Health Organization’s proposal for a global tobacco excise tax incidence of 70 percent would result in
draconian and arbitrary tax increases in almost every country, and at the same time more than triple tax and price
differences between countries, undermining tobacco manufacturers’ profits and government excise tax revenues.
10-yr T-Note: 2.47% DJIA: 17,086.63 NASDAQ: 4,473.70 S&P 500: 1,987.01 S&P 500 Undervalued: 136.2%
July 23, 2014
LAFFER ASSOCIATES
Supply-Side Investment Research

2. Laffer Associates Through the Laffer Lens: Policy Potpourri, Part II
2
top Republican on the Senate Finance Committee, has made it clear that he believes any possible congressional action to
prevent further inversions should not be retroactive, which would protect the eight companies with inversion deals currently
in the works.
6
Bankers are surely rushing to complete the inversions in any case, as the sooner the deals are complete, the
less likely the companies are to be forced to unwind the deals in the event of any such inversion ban being passed.
The incentive for companies to engage in inversion transactions is clear: The United States currently has the highest
corporate tax rate in the OECD (see Figure 1) and taxes worldwide income. In spite of the punitive corporate tax code, the
U.S. has some of the lowest corporate tax revenues as a share of GDP of any OECD country. This is, of course, because
the corporate tax code in the U.S. has been riddled with loopholes, deductions, special tax credits and countless other carve-
outs.
Companies exist to provide returns to their shareholders, and failure to take advantage of an accounting and/or legal
maneuver that allows a corporation to pay a lower tax rate is a disservice and a failure of fiduciary duty owed to those
shareholders who ultimately own the company. Corporations have found it more profitable to hire expensive teams of
accountants, lawyers and lobbyists to find new ways to get around corporate tax payments than to simply pay their tax bills.
Tax inversions are just another way of avoiding massive tax payments.
Figure 1
Corporate Tax Rates: U.S. vs. OECD Average vs. U.S. Inversion Frequency
7
(annual, 1983 to 2014, some 2014 inversions are incomplete)
Figure 1 shows the U.S. corporate tax rate, the corporate tax rate of the average OECD country and the number of
inversions completed since 1983. In 1983, the U.S. corporate tax rate was only slightly higher than that of the average
OECD country, making inversion not all that profitable of an maneuver. After the massive tax rate cut provided by the 1986
Tax Act, the U.S. enjoyed lower-than-average corporate tax rates for years—understandably, no inversions occurred. But as
the rest of the world continued to cut corporate tax rates, the U.S. was left by the wayside, the possible tax savings from
inversion continued to compound, and U.S. companies increasingly inverted.
U.S. corporations are acting in the interest of their shareholders by inverting. The problem with inversions is not that they
can legally occur; the problem is that the U.S. tax code makes such maneuvers profitable. Corporate tax reform that lowers
6
The eight companies with inversion deals currently in the works are: AbbVie Inc., Medtronic Inc., Mylan Inc., Auxilium Pharmaceuticals Inc., Chiquita
Brands International Inc., Horizon Pharma Inc., Applied Materials Inc. and Salix Pharmaceuticals Ltd. We’d expect many more companies to
announce inversion plans in the near future. Additionally, most of the deals currently in process have clauses allowing for termination of the inversion
if U.S. tax codes change such that the tax advantages of inversion disappear.
For more, see: Richard Rubin, “Hatch’s Conditions on Inversion Law Show Partisan Split,” Bloomberg, July 22, 2014.
http://www.bloomberg.com/news/2014-07-22/hatch-s-conditions-on-inversion-law-show-partisan-split.html
7
Includes AbbVie and Abbott Labs (both 2014) and excludes AOE Corporation (inversion date unknown, sometime 2009-14).
0
2
4
6
8
10
12
20%
25%
30%
35%
40%
45%
50%
55%
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
#ofInversions
CorporateTaxRate
# of Inversions
U.S. Corporate Tax Rate*
OECD Avg. (equal-weighted)
Corporate Tax Rate*
Source: OECD, Congressional Research Service
Little incentive to invert
when U.S. tax rate is
lower or roughly equal
with the rest of the
developed world
American Jobs
Creation Act of
2004, added §7874
to IRS code, placing
stricter restrictions
on inversions
* includes avgerage state and local tax rates

3. Laffer Associates Through the Laffer Lens: Policy Potpourri, Part II
3
rates and broadens the tax base by eliminating loopholes, deductions, exclusions, etc. would make inversions and other tax
avoidance schemes simply not worth it and would allow corporations to get back to running their businesses instead of
becoming professional tax planners.
8
Foreign Account Tax Compliance Act (FATCA)
As of July 1
st
, 2014 the bulk of the Foreign Account Tax Compliance Act (FATCA) is in effect, with the full package of rules
and regulations effective starting in 2017. Originally adjunct to the Hiring Incentives to Restore Employment Act, FATCA
requires foreign financial institutions (FFIs) to report to the IRS account balances, withdrawals and deposits conducted by
American citizens and green card holders who have deposits worth more than $50,000. Seeking a heightened level of
transparency, FATCA comes as an attempt to boost government revenue by raising tax compliance abroad—specifically
targeted at wealthy Americans with foreign bank accounts. The IRS intends to match information reported by the FFIs with
information reported on tax returns filed by Americans and green card holders with foreign accounts.
Over 77,000 FFIs have already agreed to work through such a mountain of paperwork, and the penalty for not doing so in
accordance with FATCA is a hefty 30 percent penalty on all US-sourced income passed to account holders. Nevertheless, a
Deloitte report found that 92% of companies surveyed don’t have the processes in place to withhold the correct amounts of
taxes owed under FATCA.
9
The congressional Joint Committee on Taxation anticipates a revenue gain of $8.7 billion over ten years—a modest figure
for the amount of international effort and expense required. Furthermore, with the introduction of FATCA, Americans with
large sums of money resting in tax havens are just as likely to reinvest their money in other ventures rather than give it back
to Uncle Sam.
FATCA creates just one more reason for wealthy expats to renounce their U.S. citizenship (Figure 2). In 2013, 2,999 U.S.
citizens renounced their citizenship or green cards, and just over 1,000 did so in the first quarter of 2014.
10
Figure 2
Number of U.S. Citizens Renouncing Citizenship
(quarterly, 1Q-00 to 1Q-14)
While certainly bad policy, a number of commentators have taken the opportunity to predict that FATCA will lead to a
collapse in the dollar. Many of these predictions have been used in fear-mongering marketing campaigns selling gold and
8
For more on corporate tax reform, see: Arthur B. Laffer, Mark Matson and Daniel J. List, “The U.S. Corporate Tax Code: Ripe for Bipartisan
Reform,” Laffer Associates, March 6, 2013.
9
Samuel Rubenfeld, “Fatca Updates Keep Coming as Firms Strive to Comply,” The Wall Street Journal’s Risk and Compliance Journal, June 30,
2014. http://blogs.wsj.com/riskandcompliance/2014/06/30/fatca-updates-keep-coming-as-companies-strive-to-comply/
10
For more on expats renouncing their U.S. citizenship, see: Paul Abelkop, “Take the Money and Run,” Laffer Associates, September 26, 2014.
0
200
400
600
800
1,000
1,200
0
200
400
600
800
1,000
1,200
1Q-00
1Q-01
1Q-02
1Q-03
1Q-04
1Q-05
1Q-06
1Q-07
1Q-08
1Q-09
1Q-10
1Q-11
1Q-12
1Q-13
1Q-14
Source: IRS, Federal Register

4. Laffer Associates Through the Laffer Lens: Policy Potpourri, Part II
4
other precious metals by claiming that FATCA will make “it essentially impossible for Americans to protect their savings,”
11
prompting total loss of confidence in the dollar and a financial meltdown. We aren’t fans of FATCA, but we believe any
effects on the value of the dollar worldwide will be minimal.
A very real consequence of FATCA is already visible, however. Foreign banks are refusing to do business with Americans,
including closing some accounts of long-time American customers. Some banks are raising account minimums for
Americans to far higher levels so as to ensure that bank earnings from those deposits can cover the now-higher
administrative and accounting costs.
The WHO’s Proposed International Cigarette Tax
The Conference of the Parties to the World Health Organization (WHO) Framework Convention on Tobacco Control, slated
to begin on October 13
th
, will address the mounting pressure for international cigarette excise tax harmonization. This
political push, despite lacking economic rationale, has been fueled by the WHO’s recent proposal to increase tobacco excise
taxes12
such that they constitute no less than 70 percent of the retail price of tobacco consumption.
13
The primary goal of such high tax rates is to increase the purchase price of cigarettes, thereby causing current smokers to
reduce or eliminate their tobacco consumption, as well as discouraging new smokers (especially youth) from beginning
smoking in the first place. Proponents claim that such an increase in excise tax rates is progressive (i.e. impacting high-
income individuals more than low income individuals), will cause no increase in illicit trade (given uniformity of
implementation) and will have a minimal or positive impact on inflation and employment. There is no consensus among
economists on these points, however, and these claims have proven to be quite contentious. The fact of the matter is that,
even in the highest tax region in the world—the European Union—not even one country currently applies such a high tax
rate to tobacco. As our new book, Handbook of Tobacco Taxation: Theory and Practice, outlines through theory and
practical experiences, countries need to retain control of their own fiscal policy because one size does not fit all.
14
Prior to
examining the arguments set forth by the WHO’s proposal, however, it is helpful to review the underlying principles of
cigarette excise taxation.
The Economics of Tobacco Excise Taxation
Presently, excise taxes are generally a mechanism to 1.) generate revenues for the overall government budget, 2.) curb
consumption (e.g. “sin” taxes on alcohol and tobacco), 3.) act as an “earmarked tax” to fund a public good (much like
gasoline taxes often fund road maintenance and repair), or 4.) correct for a negative externality of consumption (e.g., fat
taxes on fatty foods)—or any combination of the four. In order to determine the appropriate level or rate of excise taxation
on cigarettes, governments often rely on the price elasticity of cigarette demand, as well as the cross-price and income
elasticities of demand.
The price elasticity of demand measures the change in quantity demanded in response to a given change in price. Although
many studies often place the price elasticity of cigarette demand between -0.3 and -0.5 for developed countries,
15,16
which
implies that tax increases can simultaneously generate the double dividend of increasing tax revenues and reducing smoking
incidence time, there are increasingly examples of much higher price elasticities due to the income effect as illustrated in
Table 1 and to the availability of substitutes (i.e. roll-your-own tobacco, duty-free cigarettes, illicit cigarettes).
17
Generally,
countries facing relatively elastic price demand for tax paid cigarettes (i.e. the UK and Ireland), tend to have reduced
cigarette affordability,
18
and either a large share of other tobacco products consumed (UK) or a large share of non-domestic
consumption (Ireland). The WHO’s proposal relies heavily on the assumption that the price elasticity of cigarette demand in
developed countries is inelastic and between -0.3 to -0.5, which is problematic for countries outside of this range as the tax-
bearing capacity of cigarettes will not be able to support such a high level of taxation.
11
“H.R. 2847 Expected to Cause U.S. Dollar to Collapse,” Truth or Fiction.
http://www.truthorfiction.com/rumors/h/HR-2847-Dollar-Collapse.htm#.Uz17jPnIbpo
12
The two types of excises that governments can administer on tobacco products are a specific excise tax and an ad valorem excise tax—these can
also be used together in a mixed system. A specific excise tax is a fixed monetary amount per unit (e.g. pack, weight, carton, piece) of tobacco
products, whereas an ad valorem excise tax is a percentage tax on the price of each unit.
13
“WHO Technical Manual on Tobacco Tax Administration,” World Health Organization, 2010.
http://www.who.int/tobacco/publications/economics/tax_administration/en/
14
Arthur B. Laffer, Ph.D., Handbook of Tobacco Taxation: Theory and Practice, July 2014.
http://www.laffercenter.com/laffers-international-tobacco-taxation-handbook-governments-roadmap-optimize-tax-revenues/
15
Frank J. Chaloupka and Kenneth E. Warner, “The Economics of Smoking,” In Culyer AJ, Newhouse JP, eds. Handbook of Health Economics, v.
1B. Amsterdam: Elsevier, pp. 1539-1627, 2000.
16
A 10 percent increase in cigarette price therefore decreases cigarette demand by only 3 to 5 percent.
17
Additionally, the price elasticity of cigarette demand is impacted by the time horizon considered (i.e. short-run versus long-run), the economic
climate, the precise measurement of demand (i.e. legal or total consumption), the inclusion of cross-border activity and duty-free cigarettes, the
underlying consumer data (i.e. household and individual versus aggregated data), the measurement of smoking (i.e. intensity versus prevalence), the
sample of countries, and so forth.
18
Affordability is measured as the price of 100 packs of cigarettes divided by per capita GDP—i.e. higher values indicate reduced affordability.

5. Laffer Associates Through the Laffer Lens: Policy Potpourri, Part II
5
Table 1
Price Elasticity in Select Countries in Relation to Affordability and the Availability of Substitutes
Country
Price Elasticity
of Tax Paid
Cigarettes
Demand
Affordability
of Tax Paid
Cigarettes
Share of Non-
Domestic Product (%)
Share of
Other
Tobacco
Products (%)Legal Illicit
Japan -0.26 1.20% 0% N/A 0%
Singapore -0.58 1.90% 25.60% N/A 5.20%
France -0.74 1.90% 5.30% 5.30% 19.00%
UK -1.05 3.10% 2.70% 2.70% 15.50%
Ireland -3.6 2.60% 9.90% 9.90% 6.10%
Source: Price elasticity estimates for Japan, Singapore, and France are PMI estimates, based on
latest available data. Price elasticity estimate for the UK is from the 2010 HMRC report, “Econometric
Analysis of Cigarette Consumption in the UK”. Price elasticity estimate for Ireland is from the 2011
MoF report, “Economics of Tobacco: Modelling the Market for Cigarettes in Ireland”. Illicit trade
estimates are from the 2013 KPMG report, “Project Star: 2012 Results.”
Although a large portion of tobacco excise tax burden will fall on consumers if demand is truly inelastic, it is clear from
country-based estimates that the price elasticity of tobacco demand can vary dramatically depending on the factors
discussed above. As such, without perfectly inelastic tobacco demand, price increases will lead to a reduction in the quantity
demanded, and suppliers of tobacco will respond accordingly by decreasing output. Therefore, the demand inputs used in
tobacco production, such as labor, will decline as suppliers absorb some of the cost.
Worldwide, the International Labour Organization estimates that roughly 100 million individuals are employed in the tobacco
sector, with 90 percent of these individuals living in developing countries.
19
Imposing further tobacco excise taxes would
generate further job uncertainty in the world’s most vulnerable economies. Even in developed countries, such as the U.S., a
$1 increase in the price of cigarettes will negatively affect 74,700 to 96,800 jobs across all the different sectors of tobacco
production.
20
As tobacco taxation increases, the reduction in tobacco demand can also indirectly shift the burden onto other industries or
factors. For instance, once the reduction of tobacco output becomes significantly large enough, resources will be reallocated
from tobacco production to other industries, displacing tobacco laborers (or their wages) and affecting the markets of these
other industries, which will now face more supply, reducing the market price, ceteris paribus.
Furthermore, it is also true that the further away from optimal taxation that an economy’s tax structure is, the greater will be
the damage done by any absolute amount of taxation. In extreme circumstances, where the tax on a factor is already in or
close to the prohibitive range of the Laffer Curve, any additional increase in that tax will, by definition, elicit large withdrawals
of that factor from the productive economy. Again, if the tax were already in the prohibitive range, the large loss of productive
services of that factor would more than offset the tax increase and result in less tax revenue. The end result would be a
whole lot of damage to the economy and little if any additional tax receipts.
The WHO’s Proposed 70% Tobacco Excise Tax Incidence
As previously mentioned, the WHO recommends that countries ensure that tobacco excise taxes represent at least 70
percent of the retail price. The recommendation of the WHO is driven from non-economic objectives, which have been
developed without consideration for existing fiscal policy. In fact, the data used by the WHO Technical Manual shows that
excise duty exceeded 70 percent of the most popular price category (MPPC) in only 9 of the 183 countries in 2008—
Bulgaria, Brunei Darussalam, Cuba, Fiji, Myanmar, Poland, Seychelles, Slovakia and Venezuela. However, based on
current information, the excise incidence in Bulgaria, Myanmar, Poland, Slovakia, and Venezuela is below 70 percent,
leaving only 4 countries in the world that exceed an excise incidence of 70 percent. Of these 4 countries, 3 have a
population of less than half a million people (Brunei Darussalam, Fiji, and Seychelles) and 2 are isolated islands (Fiji and
Seychelles).
The excise tax incidence, which is the measurement used by the WHO’s proposal, is calculated by taking the ratio of the
excise tax yield
21
over the retail sales price of a reference cigarette brand. The excise tax yield is not an appropriate
measure to use as a reference benchmark, as there is no relationship between the excise tax incidence level and the
19
“Employment trends in the tobacco sector: Challenges and prospects,” International Labour Organization, International Labour Office, 2003.
20
H. Frederick Gale, Jr., Linda Foreman, and Thomas Capehart, “Tobacco and the Economy: Farms, Jobs, and Communities,” Economic Research
Service, U.S. Department of Agriculture, Agricultural Economic Report No. 789, November 2000.
21
The excise tax yield is simply the amount of excise tax paid per 1,000 cigarettes of the reference brand, excluding VAT and sales tax.

6. Laffer Associates Through the Laffer Lens: Policy Potpourri, Part II
6
monetary amount of excise tax which a consumer must pay. This discrepancy is due to the fact that the excise tax incidence
accounts for the VAT in its denominator since it is included in the retail sales price,
22
but it is not measured in the
numerator’s excise tax yield calculation, thus leading the excise tax incidence to be underestimated in countries with
relatively high VAT rates.
For example, despite having an excise tax yield similar to Germany, Denmark and Sweden, the highest excise tax incidence
illustrated in Figure 3 is Hong Kong at 68.2 percent, while the other three countries’ incidences are 56.9 percent, 54.75
percent, and 48.8 percent, respectively. This is explained by the fact that nominal VAT rates are significantly higher than
Hong Kong (0 percent), at 19 percent for Germany, and 25 percent for both Denmark and Sweden.
Figure 3
Excise Tax Yields, Excise Tax Incidences, and VAT Rates
(as of January 1, 2014)
Although one of the WHO’s objectives for proposing a 70 percent excise tax incidence is to bring about international
harmonization with respect to tobacco excise taxes, regional experience in the EU suggests that harmonization can actually
move tobacco excise taxes and retail prices further away from approximation. For instance, following regional harmonization
efforts, even when only considering the “old” EU-15 countries, the excise tax yield gap between the country with the highest
yield and lowest yield has risen from €166 per 1,000 cigarettes to €184 per 1,000 cigarettes, or by nearly 11 percent from
2002 to 2011.
23
The key point cannot be stressed enough: tax harmonization is very difficult to achieve without economic
distortions, even in regional areas with somewhat similar income levels.
As shown in Table 2, if countries adopted the WHO’s suggested 70 percent excise tax incidence, the average retail price
would increase from $5.66 per pack to $11.71 per pack, or by $6.04 per pack (a 107% increase). The monetary gap
between the retail price of the lowest and highest priced countries would increase from the current amount of $15.15 per
pack between the Philippines and Norway, to $49.44 per pack if all countries adopted the 70 percent excise incidence.
22
In fact, if the excise tax structure is heavily dependent upon the ad valorem excise tax, there will be a multiplier effect in the retail sales price
between the ad valorem and the VAT.
23
“The Impact of Imposing a Global Excise Target for Cigarettes: Experience from the EU Accession Countries,” International Tax & Investment
Center, August 2012.
0%
10%
20%
30%
40%
50%
60%
70%
80%
0
50
100
150
200
250
300
350
400
450
HongKong
Venezuela
Turkey
Israel
Chile
France
Bulgaria
Greece
Finland
Poland
Spain
NewZealand
Estonia
Ireland
UnitedKingdom
Latvia
Belgium
Cyprus
Portugal
Egypt
Italy
Thailand
Slovenia
Germany
Austria
Slovakia
Romania
Japan
Luxembourg
Lithuania
Mexico
Denmark
Hungary
Switzerland
CzechRepublic
Netherlands
Philippines
Indonesia
SouthKorea
Sweden
Norway
Canada
Australia
Argentina
Malaysia
India
Qatar
Bahrain
China
SouthAfrica
Ukraine
UAE
Russia
Colombia
Brazil
Peru
Percentage
$per1000Cigarettes
Ranked from High to Low Excise Tax Incidence
Excise Tax Yield ($ Per 1000 Cigarettes)
Excise Tax Incidence (%)
Nominal VAT (%)
Source: Philip Morris International, Bloomberg

7. Laffer Associates Through the Laffer Lens: Policy Potpourri, Part II
7
Moreover, in Brazil, given the other taxes that are applied on cigarettes, it would not be technically possible for Brazil to
reach the 70 percent excise tax incidence proposed by the WHO.
Table 2
By-Country Impact of the WHO’s Proposed 70% Excise Tax Incidence
Country
(lowest to highest
per-capita income)
Current
situation
RSP
(US$/pack*)
70% Excise tax
incidence
RSP
(US$/pack**)
RSP Increase
(US$/pack | %)
India 2.42 9.88 7.46 309%
Philippines 1.15 2.16 1.02 88%
Egypt 2.23 3.11 0.89 40%
Indonesia 1.27 3.08 1.81 143%
Ukraine 1.88 7.19 5.31 282%
Thailand 2.75 4.42 1.67 61%
China 2.48 8.00 5.53 223%
Peru 2.68 12.02 9.34 348%
Bulgaria 3.58 5.57 1.99 55%
Colombia 1.86 4.56 2.69 144%
South Africa 3.00 8.98 5.98 199%
Romania 4.46 10.30 5.84 131%
Mexico 3.45 6.63 3.18 92%
Malaysia 3.66 7.39 3.73 102%
Brazil*** 2.83 Not feasible*** - -
Argentina 1.76 4.34 2.58 147%
Turkey 4.42 5.44 1.01 23%
Venezuela 6.36 6.87 0.51 8%
Latvia 4.29 8.03 3.74 87%
Lithuania 3.91 8.48 4.57 117%
Poland 4.51 7.77 3.26 72%
Hungary 4.87 13.37 8.50 174%
Russia 2.53 9.76 7.23 286%
Chile 4.95 6.88 1.93 39%
Estonia 4.79 8.18 3.39 71%
Slovakia 4.90 9.96 5.06 103%
Czech Rep. 4.48 10.24 5.76 129%
Portugal 5.89 12.00 6.11 104%
Greece 5.34 8.98 3.64 68%
Taiwan 2.85 6.53 3.68 129%
Slovenia 5.07 10.52 5.45 108%
Bahrain 2.39 5.09 2.70 113%
South Korea 2.55 5.12 2.56 100%
Cyprus 6.16 11.24 5.08 82%
Spain 6.51 11.06 4.56 70%
Israel 8.64 11.63 2.99 35%
Italy 6.85 13.82 6.97 102%
Hong Kong 6.45 6.83 0.38 6%
Japan 4.18 6.56 2.38 57%
New Zealand 14.75 22.93 8.18 55%
UK 13.70 24.88 11.18 82%
Germany 7.50 14.48 6.99 93%
France 9.59 14.17 4.58 48%
UAE 2.45 5.89 3.44 140%

8. Laffer Associates Through the Laffer Lens: Policy Potpourri, Part II
8
Country
(lowest to highest
per-capita income)
Current
situation
RSP
(US$/pack*)
70% Excise tax
incidence
RSP
(US$/pack**)
RSP Increase
(US$/pack | %)
Netherlands 8.65 18.13 9.48 110%
Belgium 7.93 15.11 7.18 90%
Ireland 13.01 24.95 11.94 92%
Finland 7.67 13.44 5.77 75%
Austria 6.44 12.77 6.33 98%
Canada 9.34 19.54 10.20 109%
Denmark 8.12 20.50 12.38 153%
Sweden 9.15 28.52 19.37 212%
Australia 15.57 33.52 17.95 115%
Switzerland 9.20 15.51 6.31 69%
Qatar 2.47 5.20 2.73 110%
Norway 16.30 51.61 35.31 217%
Luxembourg 6.71 12.54 5.83 87%
Highest $16.30 $51.61
Average $5.66 $11.71 $6.04 107%
Lowest $1.15 $2.16
Gap: High vs. Low $/pack $15.15 $49.44
* Based on January 2014 excise tax rates and the Retail Selling Price of Marlboro (except for Canada -
Benson & Hedges); RSPs are per pack of 20 cigarettes. Exchange rates January 2014. Bloomberg
** The Retail Selling Price(RSP) under the 70% excise tax incidence is based solely on the assumption
that the excise tax incidence increases from the current level to 70% and that the pre-tax price has been
held constant
***Given that the current other than excise effective ad valorem rates plus VAT are already over 30%, a
70% excise rate is not feasible
Source: Philip Morris International, Bloomberg
As demonstrated in Table 2, if the WHO’s proposal is adopted, Ireland would experience a 92 percent increase in the retail
sales price of cigarettes. Based on the price elasticity of tax paid cigarette demand in Ireland, this large price increase would
lead to tax paid cigarette demand falling by over 330 percent. Even when using the flawed, but heavily relied upon,
assumption that the price elasticity of cigarette demand is -0.4, the tax paid demand for cigarettes for the countries listed in
Table 2 would drop by nearly 43 percent on average given the average retail sales price increase of 107 percent—indicating
that legal sales would fall tremendously, hurting all major tobacco manufacturers. By simulating the impact of a global
minimum excise incidence of 70 percent, it becomes even more clear that the WHO recommendation is far from best
practice: it would lead to draconian and arbitrary tax increases in almost every country, and at the same time more than triple
tax and price differences between countries, providing further incentives for illicit trade while undermining both tobacco
manufacturers’ profits and government excise tax revenue collections.
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