For years, international health organizations and policymakers have operated under a seemingly simple, yet deeply flawed, fiscal assumption: that the most effective way to reduce the consumption of specific goods—most notably tobacco—is to ensure that taxes account for a fixed percentage of the retail price. The World Health Organization (WHO), in particular, has championed a benchmark suggesting that taxes should comprise at least 75 percent of the final retail price of cigarettes.
While the objective of curbing tobacco use is a valid public health goal, the methodology used to pursue it is increasingly coming under fire from economists and tax policy experts. By prioritizing an arbitrary "tax incidence" target over sound, revenue-neutral fiscal design, policymakers are not only failing to curb consumption but are also fueling illicit trade and placing disproportionate financial burdens on the world’s most vulnerable populations.
The Flawed Logic of Retail Price Targeting
At its core, an excise tax is a levy on a specific good or activity, designed to internalize the external costs of that consumption. However, the WHO’s focus on the "tax share of retail price" creates a mathematical trap. Tax incidence—the ratio of tax to total price—is a denominator-dependent metric.
Because the final retail price is composed of both the tax and the pre-tax price (which includes manufacturing, distribution, marketing, and retailer margins), the tax incidence is inherently tied to market conditions outside of government control. If a manufacturer raises its price, the tax incidence falls, even if the tax rate remains unchanged. Conversely, if a manufacturer lowers its price, the tax incidence rises.
This creates a perverse scenario where governments are incentivized to chase a shifting target. A 75 percent tax share on a €2 product is economically worlds apart from a 75 percent share on a €20 product. Consumers and governments operate in absolute currency terms—the actual amount of money leaving a consumer’s pocket and entering the public treasury. By focusing on percentages, the WHO ignores the economic reality of behavioral responses, which are driven by the absolute increase in price, not by the percentage breakdown of the receipt.
A Chronology of Global Policy Misalignment
The push for a 75 percent tax incidence is a relatively recent development in the history of international fiscal policy, though it draws on decades of anti-tobacco advocacy.
- Early 2000s: Global health initiatives began shifting from simple price increases to more complex, systemic tax structures. The WHO’s Framework Convention on Tobacco Control (FCTC) began encouraging parties to adopt tax policies that reduce the affordability of tobacco.
- 2010s: The WHO formalized its technical manuals, explicitly promoting the 75 percent threshold as a "best practice." This benchmark was presented as a universal standard, ignoring the vast disparities in economic development between member nations.
- 2020–2025: As data from various regions—particularly the European Union—began to emerge, the disconnect between the WHO’s recommendations and real-world outcomes became impossible to ignore. Despite hitting or exceeding these tax targets, many nations saw persistent smoking rates and, simultaneously, a surge in illicit, untaxed cigarette trade.
Supporting Data: The Global Disconnect
The WHO’s own data reveals the impracticality of its universal benchmark. Among 178 countries reporting data, only 39—a mere 22 percent—meet the 75 percent tax incidence target. Of those 39, the vast majority are high-income, developed nations, with 20 located within the European Union.
This disparity highlights a "wealth bias" in international health policy. A tax regime that functions in a wealthy, low-corruption environment like Scandinavia is fundamentally ill-suited for a developing economy with different enforcement capabilities and income levels.
Furthermore, the data regarding tax burden versus tax incidence is telling. In countries like Bangladesh, one can observe a high tax incidence with a relatively low absolute tax burden. Conversely, Germany maintains a lower tax incidence while imposing a significantly higher absolute tax burden on consumers. This proves that tax incidence is an unreliable proxy for the actual fiscal impact on the economy or public health.
Official Responses and Structural Inconsistencies
The WHO’s technical manual remains a source of frustration for tax administrators. The definition of what constitutes a "tax" within the 75 percent target is notoriously inconsistent. In some iterations, the WHO includes value-added taxes (VAT) and import duties; in others, it suggests focusing only on excise duties.
This shifting guidance complicates the task for finance ministries, which require stable, predictable tax policies to manage national budgets. When international bodies provide fluctuating definitions for the same target, it undermines the credibility of the policy. Finance ministers are increasingly wary of "health-first" tax policies that do not account for the complexities of tax administration, enforcement, and the potential for revenue volatility.
Implications: The Rise of the Illicit Market
The most significant consequence of chasing an arbitrary 75 percent target is the proliferation of the black and gray markets. Basic economic theory dictates that when the legal price of a good is forced upward, consumers seek cheaper alternatives. If the tax-driven price increase is too aggressive, the incentive for smuggling, counterfeit production, and cross-border purchasing becomes overwhelming.
The European Union offers a stark case study. As of 2025, approximately 10 percent of cigarettes consumed in the EU were counterfeit or contraband. This illicit trade represents a massive leakage of tax revenue—roughly €16.7 billion—that could have been captured by member states. In countries like Ireland and France, where excise taxes are among the highest in the world, more than one-third of all cigarettes consumed are purchased outside the legal, taxed market.
The correlation is undeniable: across the EU, for every additional euro of tax levied per pack, illicit trade increases by approximately 7 percent. This phenomenon not only bankrupts the public purse but also defeats the public health objective. Illicit products are, by definition, unregulated. They bypass safety standards, age-verification laws, and ingredient disclosures. Thus, by pushing taxes to a level that encourages the black market, the WHO is inadvertently steering consumers toward products that are far more dangerous than those sold through legitimate, regulated channels.
The Need for Evidence-Based Reform
If the objective of excise tax policy is to influence behavior and raise revenue, policymakers must abandon the "percentage-share" fixation. Instead, they should return to the principles of ad quantum taxation—taxes defined in fixed currency amounts.
- Targeting Predictability: A specific tax rate (e.g., $X per pack) allows governments to accurately forecast revenue and set price floors that discourage consumption without creating the volatility associated with price-share targets.
- Addressing Regressivity: Policymakers must recognize that excise taxes on essentials or common goods are inherently regressive. Steep increases on products purchased disproportionately by low-income residents can lead to severe financial hardship. A more nuanced approach would involve integrating tax policy with social safety nets and smoking cessation programs, rather than relying solely on "punishment by price."
- Enforcement over Ideology: A tax policy is only as effective as its enforcement. Governments should prioritize the integrity of the tax base—ensuring that legal sales are not displaced by illicit trade—before raising rates.
Conclusion: A Call for Pragmatism
The WHO’s 75 percent tax incidence target is a relic of a top-down, ideological approach to global health that ignores the messy realities of the modern economy. By miscalculating the relationship between tax, price, and consumer behavior, these policies have led to a paradoxical outcome: stagnant health improvements paired with booming illicit markets.
Moving forward, international organizations and domestic policymakers must pivot toward an evidence-based framework. True success in public health and fiscal management will not be found in hitting arbitrary percentage benchmarks on a spreadsheet. Instead, it will be found in creating tax systems that are transparent, enforceable, and designed with a realistic understanding of how consumers—and the black market—actually behave.
Tax policy is a powerful tool for social engineering, but it is not a magic wand. When the goal is to improve public health, the best approach is not to force a specific percentage on the retail shelf, but to ensure that the tax burden is applied fairly, predictably, and in a way that minimizes the incentives for illicit trade. The time has come to stop chasing the 75 percent target and start building a fiscal policy that actually works.
