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72 IRET Policy Bulletin 1 (1998)

handle is hein.taxfoundation/iretpbul0031 and id is 1 raw text is: April 30, 1998 ...No.72 THERE'S NO ECONOMIC EXCUSE FOR A HIGHER CIGARETTE TAX The proposed $1.10 a pack increase in the federal excise tax on tobacco is a whopping tax hike-about $25 billion a year-that will have noticeable, adverse economic consequences. It is being justified as part of a campaign to suppress smoking. There is little doubt that the tax hike will have some impact on smoking, although the amount of the response is open to question. There are grave questions, however, about whether this is an appropriate area for federal intervention, and many flaws in the economic arguments advanced by proponents of the tax. Excise taxes and social costs Economists generally dislike excise taxes because they distort consumption and production. Consumers are dissuaded from purchasing the mix of products they would normally prefer, and which producers would normally provide, given available resources. [Tlobacco taxes are, in fact, more than large enough to correc for any reasonable measure of unintended transfers fr-om non-smokers to smokers, or economic distortions relating thereto... [The government's] object is to raise revenue, not to eliminate smoking... As a revenue measure, the tobacco tax it is an inferior, distorting tax. It is a $500 billion tax hike on a minority of the population...[tolfund one of the biggest taxftransferprograms of recent times... Economists of an interventionist frame of mind, however, sometimes recommend excise taxes to offset perceived cases of market failure, in which the price of a product may not fully reflect the costs incurred in its production or use. For example, a polluting factory may impose costs on its neighbors that are not passed on to its customers; third parties are injured in the production process, but consumers are not charged to compensate them, and over-consume the product. In other cases, Institute for IRET is a non-profit, tax exempt 501(c)3 economic policy research and educational Research organization devoted to informing the public about policies that will promote on the economic growth and efficient operation of the market economy. Economics of 1730 K Street, N.W., Suite 910 * Washington, D.C. 20006 Taxation (202) 463-1400 . Fax (202) 463-6199 e Internet www.iret.org