# Should taxes be utilized to modify behavior?

A recent topic on a site focused on current policy discussions caught my attention. The discussion was centered on how tobacco is taxed.

http://www.ncpa.org/sub/dpd/index.php?Article_ID=20212

"Taxing Tobacco by Risk
Cigarette taxes are meant to raise revenue and reduce smoking rates, yet these taxes are arbitrary and vary widely from state to state, says Pamela Villarreal, a senior policy analyst with the National Center for Policy Analysis.

The average state tax per pack of cigarettes is $1.45, but ranges from$0.17 per pack in Missouri to $4.35 per pack in New York. Furthermore, products that have been shown to be less harmful than cigarettes, such as smokeless tobacco, are often taxed at near-equivalent or greater rates. Harm reduction is an approach to public health intended as an alternative to the prohibition of certain potentially dangerous lifestyle choices" We all realize that taxes are built into the pricing of (among others) fuels, and alcohol, and cigarettes. Perhaps the information is not widely available and (out of sight - out of mind) typically not a hot debate topic. Rather than discuss the specific taxes applicable to each category, I'd like to begin a discussion on how these taxes might influence consumer purchasing decisions, how this impacts trade, any unfair advantages that might result, and the potential for corruption. ## Answers and Replies People seem to buy cigarettes whether they are$3 or $10. They are pretty addictive:tongue2: So I hear. It is definitely an incentive to quit but is that really what the tax is for? I'd like to know where the money goes. If it goes into a fund that helps to pay for health care costs relating to smoking then I would have to agree with it. American's want the right to kill themselves slowly but really who is paying for these bad choices. I don't think its a bad idea to tax unhealthy behaviors as it weighs down our healthcare system. Why should someone who takes care of themself have to pay for the increases in healthcare related to smoking and other unhealthy behaviors. There just seems to be something not quite right about it though, as an american. So to sum it up, if the tax goes to help pay for the burden it creates on society then who can complain? Also, to the last part of your post I think the tax would have to be a flat federal tax. If you can get cigarettes for example cheaper in the next state over what's the point? That only hurts store owners in the states where the tax is higher, not only for cigarettes but the gas you might buy on the way back, maybe you get some food or whatever. In that case it doesn't curb smoking at all, the state with the lowest tax just makes more money,on everything. People seem to buy cigarettes whether they are$3 or $10. They are pretty addictive:tongue2: So I hear. It is definitely an incentive to quit but is that really what the tax is for? I'd like to know where the money goes. If it goes into a fund that helps to pay for health care costs relating to smoking then I would have to agree with it. American's want the right to kill themselves slowly but really who is paying for these bad choices. I don't think its a bad idea to tax unhealthy behaviors as it weighs down our healthcare system. Why should someone who takes care of themself have to pay for the increases in healthcare related to smoking and other unhealthy behaviors. There just seems to be something not quite right about it though, as an american. So to sum it up, if the tax goes to help pay for the burden it creates on society then who can complain? Also, to the last part of your post I think the tax would have to be a flat federal tax. If you can get cigarettes for example cheaper in the next state over what's the point? That only hurts store owners in the states where the tax is higher, not only for cigarettes but the gas you might buy on the way back, maybe you get some food or whatever. In that case it doesn't curb smoking at all, the state with the lowest tax just makes more money,on everything. The insurance industry typically "rates up" tobacco users by 25% currently. An average individual policy at$400 monthly premium typically costs a tobacco user an additional $1,200 per year. The insurance industry typically "rates up" tobacco users by 25% currently. An average individual policy at$400 monthly premium typically costs a tobacco user an additional $1,200 per year. Well in that case...then again I was never asked whether or not I smoked it was a company package deal. It seems just like the rest of the tax money: it's not really going to the right places. Also the state by state differences really defeat the whole purpose. If the next state over is 1/2 hour away and its worth it to take the drive then only the stores on the border of the state with higher taxes will be hurt. A group plan MIGHT not be rated up. talk2glenn Rather than discuss the specific taxes applicable to each category, I'd like to begin a discussion on how these taxes might influence consumer purchasing decisions, how this impacts trade, any unfair advantages that might result, and the potential for corruption. I'll address these in order... A tax effectively raises the price of selling or buying a good, depending on whom the tax falls. The aggregate impact is equivalent, however; a 5% tax will have the same aggregate effect regardless of who is taxed. The impact of the tax (and revenue raised) is a function of the price elasticity - how sensitive consumers and producers are to price changes. In the case of products like cigarettes, elasticity is very low; it takes a significant change in prices to have a meaningful impact on market behavior. Elasticity also determines who bears the brunt of the impact; if the consumers are extremely sensitive to price changes, producers will absorb more of the tax increase, and vice versa. What do you mean by the effect on trade? And how do you define an "unfair" advantage? Obviously, a tax on a specific product will benefit any substitutable goods. For example, taxes on sugared sodas are a boon to the diet soda industry. Whether this is fair or not isn't an economic question, but a political one. How are you defining corruption? Any time you raise the price of one product, alternatives begin to look relatively better. This includes black market products; market participants must weight the relative costs of tax compliance with the risks of the black market. If a tax is too high relative to the risks of non-compliance, people will cheat. This is why developing countries typically have higher corruption rates than the West; they combine extremely high compliance costs with an extremely inefficient legal system, and the costs of cheating are less than the costs of behaving. Are taxes really used to modify behavior? Or is it just a nice way to justify a tax increase? States are desperate for new revenue, but they can't just raise sales, income, or other taxes without becoming really unpopular. So they go for the easy target, smokers being a prime one: there's not that many of them, they're not well liked by non-smokers, and you can always justify the extra tax with the cost of health-care excuse. caffeta. Who said democracy was the tyranny of the majority over the minority? caffeta. Who said democracy was the tyranny of the majority over the minority? Hmm. Sounds like something Glenn Beck would say. :tongue2: I was just pointing out that perhaps what looks like a major policy to change sociological trends might just be a quick source of emergency cash. Hmm. Sounds like something Glenn Beck would say. :tongue2: I was just pointing out that perhaps what looks like a major policy to change sociological trends might just be a quick source of emergency cash. I agree--but just to greater degree then in the near past. The sales pitch on the voter pamplets to obtain funds for better fire department services and better schools ("Think about the children.") rarely finds its way to better fire departments and preforming better schooling. Only the pitch has become more feverish. Jobs and pensions are in jeopardy. The obvious targets are looked at with hungrier eyes. You and me are the game animals in a degree of predation over what we have become accustomed. Last edited: Are taxes really used to modify behavior? http://www.irs.gov/app/understandingTaxes/teacher/whys_thm05_les01.jsp This is what the IRS teaches us (my bold): http://www.irs.gov/app/understandingTaxes/student/whys_thm05_les01.jsp "Theme 5: Impact of Taxes Lesson 1: How Taxes Influence Behavior Legislators have three needs in mind as they prepare tax laws- -the need to raise revenue, the need to be fair to taxpayers, and the need to influence taxpayers' behavior. Below are three excise taxes that have affected the economy and consumers' behaviors. All are direct taxes. A sin tax is used to discourage the use of products and services that could pose a risk to someone's health, such as alcohol and cigarettes. Puritan colonists used the earliest sin taxes in this country. The gasoline excise tax is a user tax on gasoline purchases. People who use gasoline pay taxes on it. These revenues maintain and build roads and highways and regulate underground pollution related to gas storage. Urban area mass transportation is developed and maintained by gas tax revenue. Luxury taxes are taxes on expensive, nonessential items, such as luxury cars. Revenue from luxury taxes is redistributed through government programs that benefit all citizens. " Last edited by a moderator: This is what the IRS teaches us (my bold): I found another link in the page you linked (it's under Activity 1: Cigarette tax): http://www.tobaccofreekids.org/reports/prices/ (bolding mine): Increasing cigarette taxes is a WIN, WIN, WIN solution for governments — a health win that reduces smoking and saves lives; a financial win that raises revenue and reduces health care costs; and a political win that is popular with the public. They pretty much admit it's for money and political gain. Like others in the thread have said, I don't think a "sin tax" is effective on its own. Just my perspective: Tobacco consumption creates what is referred to by economists as a "negative externality", aka a negative side effect of the said consumption. This can be observed by the increased cancer rates by those who smoke/chew tobacco. The idea to tax certain consumables/activities that have negative externalities stemmed from the economist Aurthur Pigou, with the objective to "internalize the externality". For example, a proportion of the explicit cost of tobacco consumption is pushed onto citizens who do not use it. Reason be, anyone over the age of 65 is eligible for medical coverage paid for by the United States government in the form of medicare. How is medicare funded; through taxpayers!!!!! If you believe that people who have government provided medical insurance are more likely to get lung cancer from tobacco use, then you would most likely believe that tobacco use increases the cost to the medicare fund. This is why private insurance companies charge higher premiums for tobacco users. A common sense solution would be to tax tobacco users to offset the increased costs associated with the consumption. However, this is not the only reason to use Pigouvian taxation, and is not the only way it "internalizes the externality". Unless the demand for tobacco is "perfectly inelastic" (elasticities were described by a previous poster), increasing the price of tobacco consumption will in fact reduce the amount of TC. However, tobacco demand is considered highly inelastic, meaning that increasing the cost 100% will not decrease consumption by 50%. There are limits to pigouvian taxation. If the price i increased too much, then people will either grow their own tobacco, and/or black market supply will increase. Black markets are interesting; when regulation forces prices to rise, black markets will form to push prices down. If regulation forces supply to fall (prohibition!), black markets will form to push prices up; which is why making tobacco use/production illegal might be a bad idea (depending on negative externalities of course!). Just my perspective: Tobacco consumption creates what is referred to by economists as a "negative externality", aka a negative side effect of the said consumption. This can be observed by the increased cancer rates by those who smoke/chew tobacco. The idea to tax certain consumables/activities that have negative externalities stemmed from the economist Aurthur Pigou, with the objective to "internalize the externality". For example, a proportion of the explicit cost of tobacco consumption is pushed onto citizens who do not use it. Reason be, anyone over the age of 65 is eligible for medical coverage paid for by the United States government in the form of medicare. How is medicare funded; through taxpayers!!!!! If you believe that people who have government provided medical insurance are more likely to get lung cancer from tobacco use, then you would most likely believe that tobacco use increases the cost to the medicare fund. This is why private insurance companies charge higher premiums for tobacco users. A common sense solution would be to tax tobacco users to offset the increased costs associated with the consumption. However, this is not the only reason to use Pigouvian taxation, and is not the only way it "internalizes the externality". Unless the demand for tobacco is "perfectly inelastic" (elasticities were described by a previous poster), increasing the price of tobacco consumption will in fact reduce the amount of TC. However, tobacco demand is considered highly inelastic, meaning that increasing the cost 100% will not decrease consumption by 50%. There are limits to pigouvian taxation. If the price i increased too much, then people will either grow their own tobacco, and/or black market supply will increase. Black markets are interesting; when regulation forces prices to rise, black markets will form to push prices down. If regulation forces supply to fall (prohibition!), black markets will form to push prices up; which is why making tobacco use/production illegal might be a bad idea (depending on negative externalities of course!). You bring up a very good point - why should taxpayers bear the additional expense related to bad behavior? Drug addicts are herded into Social Security Disability, Medicaid, and Medicare and smokers receive the benefits you've stipulated. Private insurance companies charge smokers higher rates and often deny them if they develop a smoking related condition prior to seeking insurance. Perhaps the tax on cigarettes should reflect the actual cost to the system? In the recent debate over healthcare reform, it was determined that a$5 million lifetime cap was not adequate for persons with serious illnesses. Assuming the cost of treating smoking related illnesses would not exceed a lower amount - say $3 million over a lifetime - a smoker might consider the specific cost for each pack of cigarettes smoked. A 2 pack per day (730 per year) smoker over 30 years of smoking would enjoy approximately 22,000 packs. The$3 million anticipated health care cost divided by 22,000 packs of cigarettes works out to about $136.36 health cost per pack. A tax of$136.36 per pack would certainly force smokers to think about their behavior. I think the current tax on cigarettes does nothing but increase tax revenues from a group at a disadvantage (they are addicted).

talk2glenn
Tobacco consumption creates what is referred to by economists as a "negative externality", aka a negative side effect of the said consumption.

This is not the correct definition of negative externality - these are costs of consumption not paid for by the person using the product. The negative side effect of increased cancer risk from cigarette use is obviously assumed by the smoker; it is an inernal cost by definition. He already considers this cost when making the purchasing decision for tobacco, and the government takes great pains to remind him (warning labels and advertising campaigns).

Granted, others may be on the hook for his medical costs (insurance companies or the Medicare system), but assuming no fraud, they voluntarily agreed by contract to insure his health. Some of those bets are more likely to be losers, smokers being an example. This is a cost of doing business, and not an externality, for the insurance industry.

An example of a cigarette externality would be second hand smoke - people who do not choose to smoke cigarettes but are still exposed to some cigarette smoke and some health-related risk. And an example of insurance industry externalities would be fraud - people who lie in their dealings with the company (by claiming not to be smokers when they are, for example).

People seem to buy cigarettes whether they are $3 or$10. They are pretty addictive:tongue2: So I hear. It is definitely an incentive to quit but is that really what the tax is for?
I have been addicted to cigarettes in the past and I was very adamant about quitting for several years and now I find that I can smoke with one friend when she gives me cigarettes but then I refuse to buy them for myself. I have found that I can be "situationally" addicted when she is around but have no trouble going without when she is not. I assume that this means that anyone could eventually make the choice not to smoke if the cost of smoking was high enough, but who knows how much money some people are willing to sacrifice (or steal) in order to avoid making the choice to go without.

I have been addicted to cigarettes in the past and I was very adamant about quitting for several years and now I find that I can smoke with one friend when she gives me cigarettes but then I refuse to buy them for myself. I have found that I can be "situationally" addicted when she is around but have no trouble going without when she is not. I assume that this means that anyone could eventually make the choice not to smoke if the cost of smoking was high enough, but who knows how much money some people are willing to sacrifice (or steal) in order to avoid making the choice to go without.

I've heard the same situational argument for cocaine use - as a hedge against planned excessive alcohol consumption, only at parties (social use), and even for toothache pain remediation. The cost of the cocaine would be a barrier to more frequent (responsible?) use.

mheslep
Gold Member
Just my perspective:

Tobacco consumption creates what is referred to by economists as a "negative externality", aka a negative side effect of the said consumption. This can be observed by the increased cancer rates by those who smoke/chew tobacco. The idea to tax certain consumables/activities that have negative externalities stemmed from the economist Aurthur Pigou, with the objective to "internalize the externality". [...]
Pigou is very popular lately, drawing adherents from across the political spectrum.
http://en.wikipedia.org/wiki/Pigou_Club

mheslep
Gold Member
caffeta. Who said democracy was the tyranny of the majority over the minority?

Hmm. Sounds like something Glenn Beck would say. :tongue2:
[...]
Then he's in good company, as the phrase is originally from http://xroads.virginia.edu/~HYPER/DETOC/1_ch15.htm" [Broken].

Last edited by a moderator:
I've heard the same situational argument for cocaine use - as a hedge against planned excessive alcohol consumption, only at parties (social use), and even for toothache pain remediation. The cost of the cocaine would be a barrier to more frequent (responsible?) use.
That sounds more like excuses to use cocaine. Are you saying that these people feel driven to use cocaine in such situations but not outside of them? Can they use at a party and then feel no urge to use with a colleague at work the next day?

BTW, I do think that the cost of cocaine or anything can (eventually) create a barrier to using, although it can be a gradual sickening with the opportunity costs of use. For example, people may go into debt to maintain some addiction and not worry about until they are bankrupt and stealing or otherwise bartering to get their fix. Eventually, some people will decide they're sick of worrying about going to prison and quit while others will convince themselves that prison is a fiction that will never happen to them - until they end up in prison.

I think taxes, fines, and other penalties can be used to torture people for their addictions to the point that they will choose to fight those addictions, but I wonder if it's worth it. After all, addiction doesn't really have so much to do with substances themselves as it does with patterns of behavior, pleasure, and comfort. When GWBush said that people are addicted to oil, he really meant they are addicted to the lifestyles that are facilitated by having lots of cheap oil available. You could raise the price of gas to European levels for US consumers and businesses and see which consumption and business habits they kick to lower the opportunity cost, but maybe it would be better to just keep lowering the price until they abruptly run out and have to quit cold turkey (with the hope that it doesn't kill them - or some anyway).

That sounds more like excuses to use cocaine. Are you saying that these people feel driven to use cocaine in such situations but not outside of them? Can they use at a party and then feel no urge to use with a colleague at work the next day?

BTW, I do think that the cost of cocaine or anything can (eventually) create a barrier to using, although it can be a gradual sickening with the opportunity costs of use. For example, people may go into debt to maintain some addiction and not worry about until they are bankrupt and stealing or otherwise bartering to get their fix. Eventually, some people will decide they're sick of worrying about going to prison and quit while others will convince themselves that prison is a fiction that will never happen to them - until they end up in prison.

I think taxes, fines, and other penalties can be used to torture people for their addictions to the point that they will choose to fight those addictions, but I wonder if it's worth it. After all, addiction doesn't really have so much to do with substances themselves as it does with patterns of behavior, pleasure, and comfort. When GWBush said that people are addicted to oil, he really meant they are addicted to the lifestyles that are facilitated by having lots of cheap oil available. You could raise the price of gas to European levels for US consumers and businesses and see which consumption and business habits they kick to lower the opportunity cost, but maybe it would be better to just keep lowering the price until they abruptly run out and have to quit cold turkey (with the hope that it doesn't kill them - or some anyway).

I'm sure some people will use any excuse to validate their cocaine use. However, the person who never uses it except in certain social settings might not be as sensitive to it's cost.

As for Bush and oil - I suppose an arguement could also be made for the addiction of welfare, unemployment, EITC, and the dream of single payer (rich people) healthcare - or not?

As for Bush and oil - I suppose an arguement could also be made for the addiction of welfare, unemployment, EITC, and the dream of single payer (rich people) healthcare - or not?
This sounds like a superficial argument to me, based on a desire to use "addiction" as nothing more than a word to intimidate people out of something. Addiction has a specific meaning, which has to do with patterns of usage/consumption that cause suffering (i.e. withdrawal symptoms) when usage is interrupted.

People could indeed be addicted to any regular source of income, including public assistance, pension, or income from paid employment. I would agree that the economy generally is addicted to regularized income and that many people and businesses would have trouble adapting to an economy where spending occurred sporadically in different areas according to need.

I don't think the dream of single payer healthcare is an addiction yet, except for people whose governments provide them with such health care. These people are indeed addicted to low-cost health coverage, but that is largely because it frees up their income for other consumption and they are addicted to enjoying the financial security that comes with not worrying about high health care bills, either through insurance or medical bills.

This sounds like a superficial argument to me, based on a desire to use "addiction" as nothing more than a word to intimidate people out of something. Addiction has a specific meaning, which has to do with patterns of usage/consumption that cause suffering (i.e. withdrawal symptoms) when usage is interrupted.

People could indeed be addicted to any regular source of income, including public assistance, pension, or income from paid employment. I would agree that the economy generally is addicted to regularized income and that many people and businesses would have trouble adapting to an economy where spending occurred sporadically in different areas according to need.

I don't think the dream of single payer healthcare is an addiction yet, except for people whose governments provide them with such health care. These people are indeed addicted to low-cost health coverage, but that is largely because it frees up their income for other consumption and they are addicted to enjoying the financial security that comes with not worrying about high health care bills, either through insurance or medical bills.

my bold

We've clearly moved off the OP - however, the re-distribution of taxes can also influence behavior.

my bold

We've clearly moved off the OP - however, the re-distribution of taxes can also influence behavior.

I don't see how this is not directly relevant to the OP. Using taxes along with fines or other penalties to modify behavior by dissuading habitual ones (i.e. addictions) is exactly what we're talking about. Now what are you talking about with re-distribution of taxes influencing behavior? Are you saying that smokers will teach anti-smoking classes paid for by taxing cigarettes and use the money to fund their habit? Probably not, but what do you mean then?

I don't see how this is not directly relevant to the OP. Using taxes along with fines or other penalties to modify behavior by dissuading habitual ones (i.e. addictions) is exactly what we're talking about. Now what are you talking about with re-distribution of taxes influencing behavior? Are you saying that smokers will teach anti-smoking classes paid for by taxing cigarettes and use the money to fund their habit? Probably not, but what do you mean then?

I'm clarify, the OP was centered around taxing cigarettes - the user pays more to continue their behavior. The "re-distribution of taxes" is referring to the taxes collected from one group that will benefit (influence behavior) another group.

In the second example - an incentive is given to a group to participate. This would be comparable to not taxing the cigarettes - but provide free stop smoking classes in the first example.

I'm clarify, the OP was centered around taxing cigarettes - the user pays more to continue their behavior. The "re-distribution of taxes" is referring to the taxes collected from one group that will benefit (influence behavior) another group.

In the second example - an incentive is given to a group to participate. This would be comparable to not taxing the cigarettes - but provide free stop smoking classes in the first example.
More than likely the "free" classes are only free to the participants. If they are held in a room, someone is getting paid for the room. If the teacher is getting paid, someone is paying the teacher. If they're given by volunteers on unmaintained public land, they might be free, except it's probably going to cost some gas and vehicle wear-and-tear for everyone to get to the unmaintained land, etc. etc.

More than likely the "free" classes are only free to the participants. If they are held in a room, someone is getting paid for the room. If the teacher is getting paid, someone is paying the teacher. If they're given by volunteers on unmaintained public land, they might be free, except it's probably going to cost some gas and vehicle wear-and-tear for everyone to get to the unmaintained land, etc. etc.

That is correct - the non-smokers would have to pay - to (attempt to) modify the behavior of the smoker.

That is correct - the non-smokers would have to pay - to (attempt to) modify the behavior of the smoker.

With this thought in mind, let's look back at what happens now. Smokers pay a tax on each package of cigarettes - that is intended to modify behavior (according to the IRS).

Next, we know that smokers have a high incidence of smoking-related illnesses. Insurance companies typically charge smokers about 25% more on their premiums. Further, Medicare is often left to pay the highest portion of the costs related to smoking-related illnesses (and even offers smoking cessation benefits on MAPD's).

Also in this thread, we estimated the actual costs to treat someone for smoking-related catastrophic illness (lifetime) works out to approximately $130 per pack of cigarettes smoked. Given all of these assumptions - why isn't it reasonable to levy a tax that represents the actual cost related to the behavior - why not charge$135 per pack of cigarettes and save the taxpayers on the back end?

Should taxes be utilized to modify behavior?

Yes, there should.

Call those people who advance the effort to tax others for their behaviors and habits, "Behavioral Assessors."

A Behavioral Assessor tax could then be levied on those who express this behavior.

Should taxes be utilized to modify behavior?

Yes, there should.

Call those people who advance the effort to tax others for their behaviors and habits, "Behavioral Assessors."

A Behavioral Assessor tax could then be levied on those who express this behavior.

Nice...