Title:"Tobacco Taxes in Canada: An Analysis of Elasticities and Salience"
Abstract: This paper investigates multiple aspects of consumers' behavioural response to tobacco taxation in Canada, using monthly micro-data from 2000 to 2010. I estimate baseline intensive and extensive margin tax elasticities of -.087 and-.03 respectively, and examine demographic and geographic heterogeneity in these elasticities. First, responsiveness to tobacco taxes has decreased overtime, implying that tobacco taxes are becoming less effective as a deterrent to smoking. Second, university graduates are shown to be more responsive to tobacco taxes than those without a university degree. This adds an additional degree of regressivity to tobacco taxes. Third, suggestive evidence indicates that Ontario and Quebec no longer have smaller elasticities due to tax evasion opportunities, which was the case in the 1990s. I discuss the reasons why this is the case. Next, I examine whether taxes included in the price tag are more salient than taxes added at the register, and whether the salience varies by demographic groups. The findings show that lower education groups fully internalize register taxes, while university graduates do not. This has implications for regressivity and legislation dictating that taxes be included in price tags. Finally, I use survey evidence to demonstrate how the common procedure used for estimating intensive margin elasticities is likely biased.