Quote:
|
Originally Posted by joshbaumgartner
The HF charts seem to be very suspect. Chart 3 below appears to be simply based on one linear line (the red), from which the blue is extrapolated simply by percentage.
|
There is a link to the methodology used. It is fair to question the assumptions used. But, I think the way the chart looks is generally going to be the way it looks regardless of any reasonable assumptions plug into their methodology.
Quote:
|
I don't believe the decline is that purely linear, so therefore the only true data points on the graph are the two points of the Current Tax line, and that much is giving the credit that may not be due.
|
In one respect I agree with you because price elasticity is almost never static over time, given the number of real world variables economists can not set up controls for they often use a constant for price elasticity. Assuming the price elasticity of cigarette purchases is greater than zero the demand at higher prices will be lower by definition and for every unit increase in the tax there will be less than a unit in taxes collected. Also assuming a declining population of smokers you will have a downward slope in taxes collected, and then if you assume different price elasticities given the two price levels, the red line will have a different slope than the blue line.
Quote:
|
But even if we assume the red line to be accurate, the blue line doesn't really show how the increased tax rate accelerates decline. The red line declines from $6.5 billion to $3.0 billion (decline of 58% with 12 year total receipts of $57 billion) while the blue is from $7.5 billion to $3.5 billion (decline of 53% with 12 year total receipts of $66 billion). This seems in fact to go against their findings that decline is accelerated, in that the blue line declines about the same (the 4% probably is due to my own inaccuracies in reading the graph), if not less than the red line, and in any case total revenue is indeed higher by more than 15% over the 12 year illustrated period.
|
The tax revenue is higher at each point in the chart assuming a higher tax rate and price elasticity less than one.
Using simple numbers:
A) 100 smokers at $1 per pack of cigarettes buy 100 packs.
B) 50 smokers at $1 per pack buys 50 packs.
Assuming price elasticity of 0.25 ( for every incremental increase in price the change in demand changes by .25 of the change in price)
C) 100 smokers at $1.50 per pack buy 75 packs.
D) 50 smokers at $1.50 per pack buy 37.5 packs.
If the tax collected is $.50 per pack in scenario A the tax collected is $50. In scenario B the tax collected is $25.
Then if we increase the tax to $1.00 per pack in scenario C the tax collected is $75.00. In scenario D the tax collected is $37.50.
If we graphed the data we would have two separate lines with the same slope because we used a constant for elasticity. But the gap between the two gets progressively smaller. The HF did not use a constant for elasticity . They correctly used different price elasticity ratios to try and more accurately reflect the demographics of smokers. For example a 50 year old millionaire won't change his smoking behavior because of price the way a 21 year old student would.
Quote:
|
So while the graph below is supposedly indicating how increasing taxes will actually undermine future tax revenue, it actually demonstrates quite the opposite if you look at it more closely than to simple see three downward lines and assume that the graph title is therefore true.
|
I think the graph illustrates two issues, one is price elasticity and the other is an assumption of fewer smokers over time. If the only variable was a change in the tax or the price all we would have seen two horizontal lines in the chart.