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Cigarette taxes are regressive and don’t reduce smoking very much

A question I’ve asked before; “Why do we tax people?”

Probably the most common answer would be ‘To pay for stuff’. But that is not the only answer. Recognizing that taxes affect incentives, politicians also use taxes to discourage undesirable behavior. If you tax something, people do less of it.

This is the logic behind cigarette taxes. But, with nearly 3 in 4 smokers are from lower-income communities, these taxes are ‘regressive’, meaning that they take a greater share of income from the poor than from the rich.

For some, this is a good thing. In a recent interview, Michael Bloomberg – who as mayor of New York was notorious for his ceaseless attempts to micromanage the lives of the city’s inhabitants – said “Some people say taxes are regressive, but in this case – yes, they are. That’s the good thing about them. Because the problem is in people that don’t have a lot of money, so higher taxes should have a bigger impact on their behaviour and how they deal with themselves.”

But the empirical literature does not support this argument, at least at rates below 100%. Instead, we have high tax rates on these products mostly purchased by the less well off with very little compensation in terms of reduced smoking. Demand for cigarettes is pretty price inelastic in the jargon, meaning that the percentage change in quantity demanded is smaller than the percentage change in price following a tax increase. This is because cigarettes are addictive, something I can attest to personally as an ex-smoker. But this inelasticity makes them a handy source of revenues. Maybe we are back to ‘To pay for stuff’ after all?

Leaving aside the question of whether government ought to be involving itself in these sorts of personal decisions (Milton Friedman argued that it shouldn’t), cigarette taxes don’t even appear to be working on their own terms.

John Phelan is an economist at the Center of the American Experiment. 




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