Sunday, December 28, 2003

1. An article in the NYT tells a story of the economic impact of smoking ban in NY city. As its title suggests, the result is "clear air", but "murky economics". Mayor Bloomberg was one of the pioneers in pushing the antismoking law in NY city. Banning smoking? I don't get it. If the goal is to protect non-smokers from the danger of being passive smoker, I think I could understand the banning policy. But, if you could use one bullet to kill two birds (my apologies to Jan Tinbergen -- this is just an expression, Professor!), why don't you do that? That one bullet is higher tax: Put high tax on cigarette, it will discourage consumption, both active and passive smokers will be reduced in number. Some anti-tax economists would disagree. But here's the story:

Friends asked me how I could quit smoking so easily. I told them, it's simple: cigarette is so expensive here in the U.S. Me the student could only afford smoking for the first year of my living in this country. The sharp difference between prices here and at home finally *forced* me to quit -- well to be exact, I *voluntarily chose* to exit. (And yes, I did it without all those pathetic patches, nicotine subs, etc). So, it's the high price. So, it's the high tax. The retail sellers inevitably raised prices due to the high tax imposed by the government. Message read. So, as far as discouraging smoking is concerned, high tax would work. What about generating income? Not really. For the latter, there would be a tax rate below which tax revenue could rise but beyond which tax revenue would fall. Becker in his eloquent book wrote that the treshold level of cigarette tax is about 95c per pack. Above this level, tax revenue will just fall. Why? Reduced consumption, disincentives for new smoker, and smuggling. (In this article, Becker argues against higher tax on cigarette. I agree, if the only objective is income generation. I disagree if it's to discourage consumption. In other part in the book, Becker agues for higher tax on alcoholic beverages. So I see a contradiction.)

How do we explain this? In theory of taxation, we know that taxes on cigarette, alcoholic beverages, and other "bad" products are called "sumptuary" taxes: the main objective of their imposition is to discourage consumption, NOT to generate revenues. The demand for goods like cigarette is usually inelastic, so quantity does not change significantly due to tax change. Harberger has proved that if income is your objective, tax the elastic good. But I would believe that you don't want to use cigarette tax as your income machine. Tax it for sumptuary reason. Banning smoking is useless, so is putting that stupid label: "Smoking is bad for your health".

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