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Title of the article How Obama’s tobacco tax would drive down smoking
rates
Many of those gains would be concentrated among younger Americans, who would take up
smoking at lower rates:
A few years after the hypothetical tax increase took effect, the number of 12- to 17-year-olds
who smoked cigarettes would be about 5 percent lower than it would be otherwise, the
number of 18-year-old smokers would be 4.5 percent lower, the number of 19- to 39-year-
old smokers would be almost 4 percent lower, and the number of smokers age 40 or older
would be about 1.5 percent lower.
The CBO data suggests that a cigarette tax is more successful at reducing tobacco use among
shorter-term smokers, vs. older Americans who may have been smokers for a longer period
of time.
Even among those who don’t fully quit, tobacco taxes do appear to effect the intensity of
smoking. A 2012 study in the journal Tobacco Control interviewed thousands of smokers over a
time period where states increased their tobacco taxes. It found that the most intense
smokers — those who smoked 40 or more cigarettes per day — saw the steepest decline in
cigarette consumption.
“The dramatic reductions in daily smoking might be driven, at least in part, by heavier
smokers’ desire to reduce the number of cigarettes they smoke per day,” lead study author
Patricia A Cavazos-Rehg writes. “This could be because of their comorbid health problems
and/or advice from influential persons (eg, doctors/friends/family) to try to quit and/or
reduce smoking.”
Microeconomics IA Candidate Number: 002223-0028
President Barack Obama plans to nearly double the tax on tobacco in America, aiming to reduce
cigarette consumption and use the revenue gained to fund preschool education across America.
The diagram below represents a model for negative externalities. The external costs of smoking
are ignored by the smoker, therefore social benefits are less than private benefits and the MSB
curve lies below the MPB curve. The socially optimal amount of cigarette consumption is at
intersection A, where MSC=MSB and the market is in equilibrium. However, a larger quantity Q1
is consumed, leading to a welfare loss represented by the grey triangle.
(Packs)
One of the ways to cut down negative externalities is by imposing indirect taxes, which in this
case can also be called Pigovian taxes. The diagram overleaf explains how Obama
administration’s decision to double tobacco tax can reduce its consumption.
1
Microeconomics IA Candidate Number: 002223-0028
(Packs)
Assuming that the current tax raises the price to P2 and brings consumption back to the socially
efficient Q*, doubling the tax at P3 would decrease consumption even more to Q2, at least in
theory and according to this article.
Taxing tobacco is an easy way for governments to make revenue because it is taxing something
that already has a negative impact on society, which is usually more acceptable than getting
revenue from other kinds of taxation. Obama plans to use the revenue for subsidizing preschool
education; which is a positive externality that creates a good impact on society. Although this
looks great on the surface, there are many problems associated with such a large increase in
tobacco tax.
Unlike the article suggests, the demand for cigarettes is not elastic, especially for the older
generation of smokers who are more addicted to cigarettes. It will be effective in limiting the
number of young smokers (as seen in the statistics in the article) but it will not actually stop
consumption for the majority of smoking population. Moreover, taxes on negative externalities
tend to be regressive- the proportion of income paid in tax falls as income rises. Statistics show
that smoking is more prevalent in lower income groups1 in USA, therefore they pay the majority
1
Goszkowski, R. 2008. Among Americans, Smoking Decreases as Income Increases. [online] Available at:
http://www.gallup.com/poll/105550/among-americans-smoking-decreases-income-increases.aspx [Accessed: 09
May 2013]
2
Microeconomics IA Candidate Number: 002223-0028
of this tax. A lot of countries tax smokers for healthcare costs society endures, but in America,
healthcare is run by private insurance companies who often charge smokers far more on health
insurance2 and the poor end up paying a double high price, worsening income inequality.
In addition to the above, if the demand of cigarettes in the market is too low due to prices being
really high, it might harm the industry and its employees might lose jobs. There is also a chance
that people start looking for other sources of supply, such as the black market, in which case not
only will people consume more cigarettes, the government will not be able to collect any revenue
from it either. This is the most negative outcome that could come out of heavy taxation.
In the light of these arguments, the present tobacco tax in America seems sufficient if it is
combined with a variety of other possible solutions to reduce tobacco consumption. Doubling
the tobacco tax will be seen by many in America’s harsh political climate as exploitation of the
poor due to the aforementioned reasons. Subsidizing preschool education is a great decision but
it could be financed in a different way.
2
Tozzi, J. 2013. Overweight? Smoke? Pay Up for Health Insurance. [online] Available at:
http://www.businessweek.com/articles/2013-01-11/overweight-smoke-pay-up [Accessed: 9 May 2013]
3
Bibliography:
Goszkowski, R. 2008. Among Americans, Smoking Decreases as Income Increases. [online] Available at:
http://www.gallup.com/poll/105550/among-americans-smoking-decreases-income-increases.aspx
[Accessed: 09 May 2013]
Tozzi, J. 2013. Overweight? Smoke? Pay Up for Health Insurance. [online] Available at:
http://www.businessweek.com/articles/2013-01-11/overweight-smoke-pay-up [Accessed: 9 May 2013]