February 23, 2009

Colorado needs a new drug (to raise taxes on)

This editorial from The Denver Post looks at the increased consumption of smoking despite the increased tobacco taxes and discusses the option of increasing taxes on other “nervous habits” to give the government the extra revenue they’ve been trying to get. These tough economic times have driven “rattled” Coloradans to smoke more even though taxes have increased. Collections on cigarette taxes were twenty percent above the governor’s office forecasts in January alone. The editorial opts to tax another supply in high demand during this stressful time to further aid the government revenue.

I think this theory holds a grain of truth, but the explanation and rationale need to be explored economically. The price of cigarettes has increased, which, for a normal good, would decrease the consumption of cigarettes. However, cigarette consumption has increased with the increasing price. This would make it a Giffen good. Consumers still prefer cigarettes over other goods. They are willing to give up other things to either compensate for the increased price or to simply get more. This would suggest that not just any other good would suffice. It would have to be another Giffen good. The Government could tax a good that, despite the price increase, consumers would still prefer over other goods and consume more of during stressful times.

The editorial suggests chocolate as a possibility. This could work because a lot of people turn to food as a stress reliever and chocolate is most often number one. However, consumers would have to prefer chocolate to other habitual stress relievers. If chocolate turned out to be a Giffen good the extra spending and higher price would generate the government’s much needed revenue. However, this stance assumes that the government is not over spending the revenue they already have. This is a possible solution, but only as a last resort. After all, who wants the very luxuries of life taxed more than they already are? I sure don’t.

1 comment:

Larry Eubanks said...

It seems to me that if people increase smoking as a stress reliever that this is best model as a change in preferences.