ISET

On November 19, ISET was visited by Mr. Alan Fuchs of the World Bank Group, whose presentation, 'Taxing Tobacco in Georgia: The welfare and distributional gains of quitting smoking’, delved into the welfare and distributional impact of increasing taxes on tobacco in Georgia.

A large portion of Georgia’s population smoke, despite its long-proven negative health effects; approximately eight million deaths per year are attributed to tobacco consumption. As Mr. Fuchs stated, Georgia faces significant health, economic and social costs due to the prevalence of cigarette smoking.

Mr. Fuchs’ presentation examined how raising taxes on tobacco products can be an effective way of reducing smoking. The World Bank used an Extended Cost-Benefit Analysis (ECBA) method to simulate the welfare and distributional impact of raising the price of cigarettes, which showed that poorer households have a tendency to reduce their tobacco consumption when faced with higher prices of cigarettes. However, although the same ECBA method was used by the World Bank in similar studies in Russia, Chile, South Africa, Myanmar and Indonesia, the studies differed according to the datasets available. In some countries (such as Russia and South Africa) the datasets were widespread and informative, but others (including Georgia) were far less complete, making the results somewhat less reliable.

At the initiative of the Government of Georgia, a new model of corporate taxation was introduced in 2017. The so-called Estonian Model of Corporate Income Tax (CIT) reform envisaged a transition to a model wherein enterprises would only be taxed on profit distribution. The overall objective of the reform was to accelerate the country's economic growth through the elimination of retained earnings tax, as well as to create a conducive environment for business start-ups and improve tax administration. According to our estimates, it costs the state budget of Georgia more than 1bn Georgian Lari of forgone profit taxes.

The ISET Policy Institute has been engaged with the Budget and Finance Committee of the Parliament and PwC in the ex-post Regulatory Impact Assessment (RIA) of the CIT reform, commissioned by the GIZ. The objective of the ex-post RIA was to provide interim assessment on the reform implementation; making sure the reform is on the right track achieving its defined objectives. On October 24 2019, a team of ISET, government and PwC researchers working on the project presented their findings at a high-level meeting attended by the Chair of Parliament, Mr. Archil Talakvadze, and the Chair of Budget and Finance Committee of the Parliament, Mr. Irakli Kovzanadze, as well as other guests.

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