Nova workboard

a blog from young economists at Nova SBE

Are taxes on cigarettes increasing inequality?

Smoking cigarettes causes one out of five death in the United States and the annual expenditure on smoking related diseases amount to nearly $160 billion.[1] Therefore, are taxes on cigarettes not only a way to increasing tax revenue but also decrease expenditure and save lives. In 2009, the federal excise taxes on cigarettes increased by 158% hoping to get 1 million smokers to quit and to prevent 2 million young people from ever starting. However, do taxes on cigarettes have the intended effect or are they merely punishing low-income households and thereby increasing inequality?

Cigarettes are an addictive good making it difficult to quit when first started. Theory on myopic addiction states that addicted people are short sighted and irrational. This means that even though price changes affect demand, there is a tendency of a price increase to have a smaller effect than a price decrease.[2] Because of the addictive power of cigarettes, demand is quite inelastic. A meta-analysis on price-elasticities of cigarette demand by Gallet and List shows that a price increase of 10% will lead to a drop in demand of only 3.2% for people older than 24 years, which also is the age group that consume the most. This means that the consumer is highly affected in an economic perspective, because they pay a high price (due to the tax) for a good that they do not wish to stop using or are unable to because of addiction and therefore have to decrease consumption of other goods if financial constraint.

However, who are the typical smokers and thereby who are really affected by these taxes? Studies shows that smoking is high among certain population groups, especially groups with low education levels and people living below the poverty level.  26.1% of people living below the poverty level smoke compared to 13.9% of people living above it. This means that low-income households are more affected by cigarettes taxes, but not only because they are the group where most people smoke, but also because they spend the larger fraction of their income on cigarettes. A study of the Consequences of High Cigarette Excise Taxes for Low-Income Smokers[3] in New York shows that low-income households (below $30.000 a year) spent 23.6% (14.2% nationally) of their annual income on cigarettes in 2011-2012 while households with a yearly income above $60.000 only spent 2.2% (2.0% nationally). Because of this, imposing taxes on cigarettes might be a way to lower consumption but it do as well imposes a significant financial burden on some of the poorest people and thereby just increase inequality.

Written by Ida Hammerberg Nielsen, Exchange student at NOVA SBE

[1] https://www.cdc.gov/tobacco/data_statistics/index.htm

[2] http://fjc.people.uic.edu/Presentations/Slides/rational.addiction.pdf

[3] http://journals.plos.org/plosone/article?id=10.1371/journal.pone.0043838#top

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Author: studentnovasbe

Master student in Nova Sbe

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