Introduction:
While tobacco taxation has proven to be the most effective measures to reduce the demand for tobacco, it might affect well-being of the poor population. Therefore, consideration of any change in taxation policy requires comprehensive insight of the effects that policy measures have on the change in poverty and inequality.

Objective:
The main research objective is to assess how an increase in tobacco taxation affects poverty and inequality in Serbia. More specifically, the study estimates change in basic FGT poverty indices (headcount ratio, poverty gap and poverty severity) and change in progressivity of income redistribution following the increase in cigarette prices.

Material and Methods:
The methodological framework consists of two building blocks: i) scenario analysis to simulate the effects of tobacco taxation on poverty; ii) scenario analysis to simulate the effects of tobacco taxation on inequality in Serbia. The consumption dominance curve approach is used to estimate changes in the poverty indicators. The concentration curve and the Kakwani progressivity index are used as indicators of tobacco taxation progressivity.

Results:
The same two scenarios of increase in tobacco taxation are applied to both poverty and inequality analysis: i) an increase in specific tax for 25%, and ii) an increase in specific tax for 50 %. In both scenarios, increase in tobacco taxation leads to increase in poverty across all three FGT indices. Regarding inequality, tobacco expenditures are regressive relative to the income, but increase in tobacco taxation is progressive, which is confirmed by the Kakwani progressivity index.

Conclusions:
Increase in tobacco taxation in Serbia is progressive but poverty-enhancing. Therefore, it is necessary to redistribute additional government revenues into subsidizing goods and services which have higher price elasticity than tobacco products and at the same time improves well-being of poor population (such as out-of-pocket health costs).