aceventura3

Perhaps it is not an either/or proposition. The point in the WSJ was not to say taxes on cigarettes should be zero, but it was more a commentary on excessive taxes.

I ask the following - do you agree that there is a optimum tax? A point (tax rate) where taxes collected are maximized?

For example, for simplicity, lets say 1 million packs of cigarettes would be sold per year, under a zero tax. Taxes collected would be zero.

What if the tax was $100,000 per pack. Odds are no packs would be sold legally. The taxes collected would be zero.

So, at some point - let's say $1 per pack you may still have 1 million packs sold. Taxes collected would be $1 million dollars.

But if you raised it to $5 per pack perhaps demand goes down but still 500,000 packs are sold - taxes collected would be $2.5 million.

If $5 is good, perhaps $10 would be better, right? Perhaps, wrong - if demand goes down to 100,000 packs, the taxes collected would be $1,000,000.

In my view of this issue, if you graph demand and taxes there would be some kind of curve or pattern and an identifiable optimum tax level or levels.

Certainly as a society we could say discouraging smoking is more important than taxes, we could choose the $10 per pack tax over the $1 per pack tax. And collect $1 million in taxes rather than $2.5 million. But we should not pretend that tax rates have no impact on demand, nor should we ignore the impact of alternative sources for smokers to avoid excessive taxes.

This issue gets revisited because of new awareness of bad tax policy, like in the case of Maryland and New Jersey.

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