The More You Tax, the Less You Get

An article in USA Today notes that big tax hikes on tobacco have dramatically reduced consumption of cigarettes. This is hardly surprising. Indeed, politicians openly state that they want higher tobacco taxes to discourage smoking, and their economic analysis is correct (even if their nanny-state impulses are not).

It is frustrating, though, that the same politicians quickly forget economic analysis when the debate shifts to taxes on work, saving, investment, and entrepreneurship. But just as tobacco consumption fell when taxes rose, it is inevitable that there will be less productive activity if statists in Congress follow through on plans to hike tax rates on capital gains and corporate income:

As Congress weighs the biggest federal cigarette tax hike in history, a
USA TODAY analysis finds that higher state taxes on smokers have produced sharp declines in consumption. The amount of decline in smoking is directly tied to the size of the tax increase, the analysis shows. Cigarette sales fell 18% in North Carolina last year after the tax was raised in two steps to 35 cents from a nickel. The tobacco-growing state resisted higher cigarette taxes until 2005.

Elsewhere: Connecticut has increased its tax to $1.51 from 50 cents per pack in 2002. Since then, per capita consumption of cigarettes has fallen 37%.
New Jersey raised its tax to $2.40 from 80 cents in 2002. Smoking has dropped 35%.

…Thomas Briant, executive director of the National Association of Tobacco Outlets, agrees that consumption will fall about 6% if a $1 federal tax is imposed but says the high tax will have negative effects. State governments will suffer a sharp decline in revenue, and black-market sales and thefts will increase to avoid the draconian tax, he says.