Thursday, February 23, 2012

Laffer Curves

Matt Yglesias:
This is a reminder that while the "Laffer Curve" does not characterize taxation in the United States as a whole, it probably does apply to cigarette taxes in the highest tax jurisdictions. The combination of success in pushing people to quit smoking and success in pushing smokers to come up with ways to avoid paying the taxes has pushed revenues below what could be gained. In public health terms, that's all fine, but for a while higher cigarette taxes were a rare form of politically palatable revenue-raiser and that's increasingly difficult to make work.

I think that this is a point that does not get enough attention.  Just because we are on the high tax side of the Laffer curve does not mean that we are not at a socially desirable point.  There is a tendency to demonize tax rates beyond the inflection point on the Laffer curve, but it is quite possible that these tax rates could have socially desirable consequences that make the lower revenue worthwhile.  And these benefits may not be symmetric: lowering cigarette taxes in New York could be made revenue neutral in a way that increases the total amount of smoking. 

Now I have tended to be laissez-faire in terms of people's right to smoke (odd for a public health person).  But I am not at all opposed to making the habit expensive, to make the deicison to stop or start be nudged towards a lower volume of smoking equilibrium.

So I think this suggests that we should think carefully about a particular piece of policy rather than simply disqualify it due to simple tests (like the Laffer curve).  In particular, this sort of reasoning might very well make sense applied to things like the gas tax.  Believing in people's right to use an SUV does not mean we shouldn't discourage the behavior, where possible. 

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