Inconsistent Tobacco Tax Arguments

Matt Ryan points out an inconsistency:

Some people say that taxing cigarettes is good since people “have to have them,” i.e., the demand for them is inelastic. Fair enough; low deadweight loss in taxation is a reasonable goal, and Ramsey would be proud. Then people come around and say it’s good to tax them because it will significantly reduce their consumption, and that’s a good thing since cigarettes are little white evil sticks. I want these people to argue with each other. Sometimes it’s the same people saying both things.

Yep, more evidence that arguments for government intervention are largely post hoc justifications rather than motivating forces.

As an aside, the lower deadweight loss from taxing inelastic goods makes economic sense if you’re only concerned with Kaldor-Hicks efficiency. Taxing a particular product simply because demand is inelastic is, however, horribly unjust. This is especially true when only a fraction of society consumes the good at all. Because my demand for cigarettes is less responsive to price than your demand for cheeseburgers, I have to pay for your healthcare as well as my own? I call exploitation!

3 Responses

  1. Indeed those arguments are inconsistent – but stating that we are taxing tobacco on the basis of an externality, and leaving it at that, isn’t.

    If quantity changes fine, if it doesn’t fine – we are just setting the private cost equal to the social cost.

    Kaldo-Hicks efficiency can be a bit dodgy – especially when the government DOESN’T compensate. However, if our welfare function is presumed to incorporate how people value equity then it still provides a fair (if unobservable) framework.

    • “Indeed those arguments are inconsistent – but stating that we are taxing tobacco on the basis of an externality, and leaving it at that, isn’t. If quantity changes fine, if it doesn’t fine – we are just setting the private cost equal to the social cost.”

      Agreed, but I don’t think many tobacco tax advocates make anything like that argument.

      “However, if our welfare function is presumed to incorporate how people value equity then it still provides a fair (if unobservable) framework.”

      I don’t see how government could have a social welfare function which incorporates folk’s conception of distributive justice in any meaningful sense. There is no neutral way to aggregate the general will.

  2. “Agreed, but I don’t think many tobacco tax advocates make anything like that argument.”

    Really – I had always thought that this was the primary reason for such taxes. Interesting.

    “There is no neutral way to aggregate the general will”

    Agreed. However, then it all becomes a question of whether belief formation by government is done optimally or is subject to systematic biases.

    Currently, I find it hard to hold an opinion here – which is why I like to first look at the case where government does set their beliefs about social welfare optimally – then work out the set of policies they could implement – then admit that the optimal set of policies in reality is only a small subset of this.

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