http://money.cnn.com/2013/04/10/news/economy/cigarette-tax/index.html?iid=SF_E_River
According to the article, President Obama calls for a 94-cent-a-pack hike on federal cigarette taxes to fund early childhood education programs. It would raise about $78 billion over 10 years for early childhood education programs while at the same time reduce smoking rates. However, it has been argued that this might be a bad idea because a higher percent of smokers are middle or low income. So they are the ones who are going to take the hit. But well it's about time people start give up smoking.
I agree that giving up smoking is the best solution, but it's the most improbable. The difficult part of this situation is that cigarettes are a demerit good, which means they have inelastic price elasticity of demand. As a consequence, despite the change in price, the quantity demanded will not alter much. This shows that even if the middle and lower income classes take the hit of the price increase, they'll still be willing to spend whatever income they have on smoking.
ReplyDeleteI agree that this is a good idea in theory, but people are not likely to give up smoking just because of a slight tax increase. However, it may cause people who pay more for cigarettes to consume less on other goods. If this extra tax does hit the middle and lower classes harder, it could have a sizable negative impact on consumption which would hinder the growth of our economy.
ReplyDeleteI think that it is a good idea to create money for the child education centers by doing this. Hopefully, this tax increase will cause the amount of smokers to stop smoking. Kevin brings up a good point we have to be careful with what goes on in this situation.
ReplyDeleteWonder what this would do to the sales of the new e-cigs and smokeless tobacco if they become more economically cheaper to use as opposed to cigarettes with these new taxes
ReplyDeleteI am a very sober person when I am poor! This might not have a dramatic impact, but it is definitely going to have some impact on cigerette sales. But is it a good thing, or is it a bad thing? Discouraging investment?
ReplyDeleteAs Priyanka said, cigarettes are a very inelastic good. A slight increase in price is not enough to change consumers attitude towards smoking or their demand for cigarettes. The article states that most smokers have relatively low incomes, so raising their taxes does not make much sense. Although these funds may go towards education, the "back lash" of this tax may have a very negative effect on government spending. The tax increase means that lower income households will spend more of their income on cigarettes. With an even lower income than these households previously had, more families may apply for government assistance programs. In turn, government spending may rise to an even greater level than it was before the tax.
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