NCPA - National Center for Policy Analysis

Do Smokers Receive The Most Benefit From Higher Cigarette Taxes?

April 17, 2002

Raising taxes on cigarettes is often viewed as unfair, since the poor and middle class spend a greater portion of their income on cigarettes than the wealthy do, and because society shouldn't solve its economic problems by creating a group of pariahs and then overtaxing them.

But some economists find this analysis flawed. They make the counterintuitive argument that increasing cigarette taxes helps smokers more than anyone else. In other words, it reduces private costs more than it reduces the social costs of smoking.

  • Many of the 20 percent of Americans who smoke have probably have tried -- though short-term desire (addiction) trumped long-term happiness.
  • Previously, economists would have said smokers made a rational decision that the pleasure they derived from cigarettes exceeded their cost.
  • Further, they argued smokers may hurt themselves, but won't drain the country's resources because so many of them will die before they can run up large Medicare bills.
  • But researchers in the field of behavioral economics believe human beings don't always make rational choices, and applied 30 years' worth of surveys on Americans' and Canadians' reported happiness to the study of smokers.

While controlling for other variables, Massachusetts Institute of Technology economists found that after cigarette taxes increased, unhappiness declined among the smoking subset of the group, indicating they had quit or cut down smoking, and were pleased about it. The taxes were also less regressive than they appear, because poorer smokers are more likely to quit when the price increases. Researchers estimate a 10 percent price increase produces about a 5 percent drop in smoking.

Because the level of cigarette taxes is not high enough to pay for smoking health problems, these economists argue that cigarette taxation is one of the public policies that can both raise revenues and cut costs.

Source: David Leonhardt, "How a Tax On Cigarettes Can Help The Taxed," New York Times, April 14, 2002; based on Jonathan Gruber and Sendhil Mullainathan (both Massachusetts Institute of Technology), "Do Cigarette Taxes Make Smokers Happier?" NBER Working Paper No.w8872, April 2002, National Bureau of Economic Research.

For NBER abstract


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