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Smoking economics in the WSJ

This Op-Ed writer in The WSJ – Brad Schiller – asserts that Obama’s ‘trebling’ of excises on cigarettes from 39 cents to $1-01 (it is not a ‘trebling’!) will reduce the tax revenues accruing to US states collecting the tax given an elasticity of demand for cigarettes of -0.8.  That is a true statement – state tax receipts will decrease – if state taxes are held constant with the increase – though Federal tax collections will increase.  

Federal taxes will increase because if demands remain inelastic increased taxes will increase the revenues on units that continue to be sold more than revenues will be lost because fewer units will be purchased.  When demand is inelastic purchases don’t fall a lot when prices rise.

The rest of the article doesn’t impress. The increased tax, it is claimed, should be rejected because it falls on the ‘poor’.  But it is foolish to consider the impacts of individual taxes on the welfare of the poor without considering the overall tax-transfer incidence.  Poor people might lose from this tax but gain from the overall tax-transfer system.

Moreover, the poor gain in terms of being less likely to die from lung cancer and heart disease.  Since the rich pay the tax they contribute tax revenue which can compensate the poor for any welfare losses they incur from not being able to kill themselves by smoking cigarettes.  I wouldn’t worry much at all about adverse distributional implications.

7 comments to Smoking economics in the WSJ

  • MikeM

    The WSJ is bound to say that in its op-ed columns, just like The Australian is bound to suggest that Kevin Rudd is a Manchurian Candidate.

    [quote]Apart from the Li visit making the Prime Minister look, more than ever, like our very own Manchurian candidate, […][/quote]

    http://www.theaustralian.news.com.au/story/0,25197,25252141-5013871,00.html

    The proposed US tax on cigarettes would still be a fraction of that in Australia. Excise in Australia is just under 25 cents per cigarette, or $5 per pack of 20, http://www.health.gov.au/internet/main/publishing.nsf/Content/health-pubhlth-strateg-drugs-tobacco-taxation.htm

  • Love the new site Harry. Pity it’s the same old codswallop tho 😛

  • Sinclair Davidson

    “the poor gain in terms of being less likely to die from lung cancer and heart disease”

    “the rich pay the tax they contribute tax revenue which can compensate the poor”

    So the poor are double dipping! In this approach the rich are better off ‘allowing’ the poor to smoke. Mind you, the poor are better off too. They get to live the lives they chose and not the lives the ‘rich’ impose on them. Now it’s true that smoking can cause early death – but it is not clear to me that this is an externality.

  • There’s also the externality of taxes giving Harry a boner. Hard to quantify that though.

  • hc

    Yobbo, I am not sure how to take that. but I assume you are suggesting that talk of a tax helps me economise on Viagra.

  • Tim

    The writer is saying that an increase in the federal tax will reduce the amount of revenue raised from state taxes on cigarettes–a claim that seems perfectly valid.

  • hc

    Tim, Your claim is correct and I was wrong. It was a sloppy read on my part. I’ve corrected the post so it reads correctly and the post title has been changed.

    Thanks for the correction.