This is a think tank?

The critical word being “think”. Cato’s Daniel Mitchell writes The More You Tax, the Less You Get . His stunning proof? Cigarette taxes. Wow.

An article in USA Today notes that big tax hikes on tobacco have dramatically reduced consumption of cigarettes. This is hardly surprising. Indeed, politicians openly state that they want higher tobacco taxes to discourage smoking, and their economic analysis is correct (even if their nanny-state impulses are not).

It is frustrating, though, that the same politicians quickly forget economic analysis when the debate shifts to taxes on work, saving, investment, and entrepreneurship. But just as tobacco consumption fell when taxes rose, it is inevitable that there will be less productive activity if statists in Congress follow through on plans to hike tax rates on capital gains and corporate income:

Yes, because working/investment and cigarettes are so alike. People pay for this kind of output?

Comments

  1. #1 Ted
    August 10, 2007

    Well, you’ve seen the “anarchism isn’t really that bad a form of government” column? I.e. Self-government good. Welcome to the People’s Democratic Republic of Ted. Your papers please:

    Uhhh, …all I got is a pipe man!

    But I think I’m with them on the concept of “the more you tax carbon fuels the less you’d get”. The difference is, I’m not suitably scared by the the prospect.

  2. #2 Josh
    August 10, 2007

    I don’t get it? What’s wrong with his reasoning? If you tax something, you’re raising the price for it. High School economics tells us that raising the price of something will reduce the demand for that thing. So, as with all things economic, there’s a point where if you raise taxes on something too much you’re actually going to reduce your revenue rather than increase it.

    This is true about all goods and services, not just cigarettes. It’s an issue of balancing opposing forces to maximize returns (assuming that your goal is to maximize tax revenues).

  3. #3 Herb
    August 10, 2007

    there’s a point where if you raise taxes on something too much you’re actually going to reduce your revenue rather than increase it.

    Cranks will claim that this turning point has been reached even when economists generally agree that it hasn’t. Check out the WSJ’s evidence for the Laffer curve on this and other blogs.

  4. #4 chaos_engineer
    August 10, 2007

    There are at least two problems with the argument.

    The first is that smoking is a really bad example of the principle. Even if cigarette taxes had stayed the same, smoking would still have decreased for other reasons. (Smoking bans, education, social stigma.) So his numbers are meaningless.

    The second is that he’s losing track of what happens to the money after the taxes are paid. Yes, if the government increases capital gains taxes, then that reduces the rate of return on investments and we’ll expect to see less investment. But what happens to the money after the government gets it? If it’s spent on infrastructure, or used to fund tax cuts on non-capital-gains income, then the economy will grow, the rate of return on investments will increase, and we’ll see more investment.

  5. #5 themissingy
    August 10, 2007

    And then there is this little thingy called demand elasticity that makes the “inevitable that there will be less productive activity if [gov’t increases] tax rates on capital gains and corporate income” not that inevitable. And really, why would cigarettes and investment vehicles have the same elasticity?

  6. #6 jd
    August 10, 2007

    The critical word is not think, but tank, as in the phrase “in the tank.” Daniel Mitchell is bought & paid for. He doesn’t have to think. He just has to make up arguments that support his employers’ interest.

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