Working Paper: NBER ID: w10906
Authors: Greg Colman; Dahlia K. Remler
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, 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.
Keywords: Cigarette Tax; Vertical Equity; Progressivity; Price Sensitivity
JEL Codes: I1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Cigarette tax increases (H29) | smoking behavior (I12) |
| Cigarette tax increases (H29) | vertical equity (D63) |
| Cigarette tax increases (H29) | lower-income smokers (P46) |
| Lower-income individuals (I32) | price sensitivity (D41) |
| Middle-income individuals (D31) | price sensitivity (D41) |
| High-income individuals (D31) | price sensitivity (D41) |
| Cigarette tax increases (H29) | regressive outcome (P27) |