Thursday, June 30, 2011

Why the Regressivity of Smoking Taxes shouldn't bother us

I’m surprised I’m writing about this, because smoking taxes seem uncontroversial. But I’ve had 2 people argue against cigarette taxes to me in the last month on the basis of their regressivity, so I figured I’d address them.


Smoking taxes are indeed regressive – they hit poor people at higher rates than rich people because more poor people smoke than rich people. Largely, we aim for progressive taxes, where rich people pay more because they can afford to.


I’m not convinced that this analysis matters when it comes to cigarette taxes. A high regressive tax rate only results in negative effects if:

1)      The activity being taxed is implicitly or explicitly a good and productive (or at the very least, necessary) activity (ie, work, consumption, savings, estate generation, etc). This is true for all taxes. The types of activities for whom regressive taxes are even worse than normal taxes are those where, holding the amount of an activity constant, we want everybody to do a little of it – like savings – and regressive taxes are more ok when, holding the amount of an activity constant, we’d prefer a few people to do a lot of it – like, arguably, smoking.

2)      The activity being taxed is potentially more productive than the marginal activity the government would spend it on (or, probably more theoretically accurately in the long term, the least productive activity the government would still spend on if instead of taxing, it rerouted spending away from its least productive activities). Again, how the behavior is distributed matters here.

3)      It cannot be avoided by switching to behavior that is equal or better in cost or desirability. This is rarely the case, but if it is, the impact of the tax doesn’t matter at all.


Disincentivizing smoking is a good thing, not a bad thing, so there is no incentive effect (from 1), and it’s something we’d strictly prefer fewer people to do in higher volume because of declining health returns to scale of smoking (which I admittedly assume). While our government is unbelievably bloated, it’s hard to see very much government spending as actually producing negative returns if you subtract out the tax effects (There are arguments for certain ethanol and energy subsidies, but even then, cheaper goods are usually good things).


Smoking is also voluntary, and switching to not smoking is desirable, not undesirable, so it fails on 3.



You could even make cigarette taxes unregressive by offsetting them with income tax cuts at low income levels, and that still makes them worth pursuing. This implicitly happens already – if there weren’t cigarette tax revenues, those tax revenues would eventually have to be made up somewhere.

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