Cigarette Taxes

Part I The Economics

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I don't smoke cigarettes. Ok, that's out of the way.

The Clinton administration has proposed much higher taxes on cigarettes in order to discourage teenage smoking and secure more money for his babysitting entitlement program. The Republicans are generally willing to increase the tax but have other ideas on how the money should be spent.

The first economic question we should ask is "Do we want to give more money to the federal government?" For years giving more money to the federal government has resulted in increasing the deficit. In theory the budget is balanced this year. Clinton tells us that we will have surpluses "as far as the eye can see," but the odds now stand at about 1 to 30 that this will happen. If the era of big government is over, why increase its size by tens of billions of dollars?

Of course, if you are a non-smoking, daycare customer, the tax increase may sound like a great idea. The idea is to make those evil tobacco companies pay for all the harm they've done. The trouble with this idea is that companies are a legal fiction. They don't pay taxes. This old government trick is still working with a lot of people. You can still count on certain politicians to declare that corporations should "pay their fair share." Corporations don't pay taxes, they're customers pay the taxes. Corporations are nothing more than invisible sales tax collectors. People will still demand to increase corporation taxes, which they end up paying. How just.

The proposed tax is a tax on the cigarette smoker, the innocent victim of the tobacco companies. These poor, addicted souls are the real target of the tax collectors. The government also plans to compensate tobacco farmers for destroying their livilihood. In government theory, the corporations are evil profit mongers but the farmers are innocent victims of economic circumstances. OK, let's say that's true. Still, a big hunk of the tax revenue will go to bailing out failing tobacco farmers.

Suppose that the government achieves its stated aim of reducing smoking. The more it reduces smoking the more money goes to tobacco farmers. The more it reduces smoking, the less revenue is provided to daycare subsidies. The administration plan depends on continued smoking. If smoking decreases sufficiently, the budget will be thrown out of whack again.

If the tax is high enough (say $1 per pack), many smokers will feel no compunctions about circumventing the law by buying stolen cigarettes. A person who smokes a pack a day would be faced with a $365 per year tax increase, a sizable expense to many people

Let's say you have a box with with 10,000 packs of cigarettes in it. The second you increase the tax by a dollar per pack, the value of that box increases by $10,000. Such a container would be a much more attractive target than a safe. By the way, you can easily fit 10,000 packs cigarettes into container 4 feet long by 4 feet wide by 3 feet high.

There would also be an increase in gray market cigarettes. Tobacco is not hard to grow. Any place you can grow tomatos, you can grow tobacco. I know. I grew some a few years ago near the shores of the Great Lakes. If taxes are high enough, tobacco growing could challenge marijuana cultivation. It's perfectly legal to grow the plant. If the government made it illegal to grow, we would be faced with enforcement costs. The war against cigarettes could have the same disasterous effects as prohibition and the war against drugs.

If you think that the cost of tax would be borne by only the smokers, consider the interdependency of our semi-totalitarian economy. Every tax produces a ripple. Smokers would be faced with a jump in the cost of living. Those living at or near poverty would receive some form of direct subsidy so that their children and dependents did not have to suffer. Middle class smokers might have to forgo vacations or appliance purchases. Over time, a tax on anyone lowers the standard of living generally.

No single one of these consequences would make a very big difference in the revenues collected; but taken together, they would greatly reduce the effective receipts of the cigarette tax. You can also assume that governmental projections of tax receipts are considerably higher than those that will be collected just as governmental projections of program costs are always lower than real costs. Increasing government through any tax lessens the amount of money that is spent on things that people are willing to buy of their own free will, and always tends toward impoverishing the society.

Still, the dream continues and people still believe it. They refuse to wake up. You can't tax other people. Whenever taxes are increased, you will always pay more taxes, whoever you are.

Unless you are a tax receiver.