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Vertical equity consequences of very high cigarette tax increases: If the poor are the ones smoking, how could cigarette tax increases be progressive?
Author(s) -
Colman Gregory J.,
Remler Dahlia K.
Publication year - 2008
Publication title -
journal of policy analysis and management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.898
H-Index - 84
eISSN - 1520-6688
pISSN - 0276-8739
DOI - 10.1002/pam.20329
Subject(s) - economics , equity (law) , welfare , demographic economics , progressive tax , purchasing , tax policy , labour economics , monetary economics , gross income , tax reform , state income tax , public economics , market economy , political science , law , operations management
Abstract Cigarette smoking is concentrated among low‐income groups. Consequently, cigarette taxes are considered regressive. However, if poorer individuals are much more price sensitive than richer individuals, then tax increases would reduce smoking much more among the poor and their cigarette tax expenditures as a share of income would rise by much less than for the rich. Warner (2000) said this phenomenon would make cigarette tax increases progressive. We test this empirically. Among low‐, middle‐, and high‐income groups, we estimate total price elasticities of _0.37, _0.35, and _0.20, respectively. We find that cigarette tax increases are not close to progressive, using both tax expenditure‐based and traditional welfare measures. This finding is robust to cross‐border purchasing, generic cigarettes, and substantial external effects. However, we find that taxes can be progressive under some behavioral economic models (Gruber & Koszegi, 2004) but that these may only apply to a small share of smokers. © 2008 by the Association for Public Policy Analysis and Management.