Thursday, September 23, 2010

If You Tax Something, You Get Less of It....

WSJ -- "Last year, Congress sharply increased the federal excise tax on "little" cigars—filtered, often sweetly favored products that are similar in size and shape to cigarettes. Some manufacturers responded by increasing the weight of their little cigars so they qualified as conventional, "large" cigars, which are taxed at lower rates. Now, a surge in sales of the small, inexpensive cigars is attracting the scrutiny of members of Congress and a prominent anti-smoking group, who say that tobacco manufacturers are exploiting this tax loophole.

Currently, little cigars—those weighing three pounds or less per thousand—are taxed at the same rate as cigarettes, about $10.07 per carton. But cigars heavier than three pounds per thousand are taxed at 52.75% of the manufacturer's price, resulting in taxes of only about $2 to $4 per carton for the smaller products in this bracket. Many small cigars already weighed almost three pounds per thousand before the tax increase, so some manufacturers needed only to modestly increase the amount of paper, filter or tobacco in their cigars to meet the higher threshold.

In the 14 months since the excise-tax increase, sales volumes of cigars classified as large more than quadrupled to 12.3 billion units. Sales of products listed as "little" cigars fell by 79% (see chart above)."

MP: This is Econ 101.  Couldn't they have predicted this would happen?  See previous, related CD post here

HT: Jonathan Butcher


At 9/23/2010 4:39 PM, Blogger sethstorm said...

Close the loophole, increase enforcement, reward turning people in.

At 9/23/2010 6:53 PM, Blogger morganovich said...

this reminds me of the way everyone bulked up their SUV's to make them qualify (by GVW) for one year depreciation.

At 9/23/2010 7:30 PM, Anonymous Anonymous said...

Couldn't they have predicted this would happen?

That presumes they didn't intend for it to happen. For example, it is widely believed that the decimation of the health insurance industry under Obamacare is not an unforeseen side effect, but exactly what was intended, in order to condition the future political debate so they can usher in government single-payer as the solution to "market failure". Similarly, anti-tobacco zealots could have seen this tax measure as a half-step, enabling them to point to its failure when in the future AKA today they demand all tobacco products pay the higher tax rate.

At 9/23/2010 7:56 PM, Blogger W.E. Heasley said...

MP writes:

“This is Econ 101. Couldn't they have predicted this would happen? “

Nope. Its not Econ 101.

Econ 101 can only acquaint one. Its Thomas Sowell’s book Applied Economics and the concept of first stage economic thinking and its relationship to political-time-horizons.

Sowell is likely telling us that Frédéric Bastiat’s “What is Seen and Unseen” essay, applied to a political-time-horizon, creates poor economic results. The political-time-horizon is short hence first stage economic thinking matches and the results are for all to see.

From Bastiat’s essay “What is Seen and Unseen“, published in 1849:

“There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.”

Politicos are “visible effect” economists.

At 9/23/2010 8:35 PM, Blogger Benjamin Cole said...

Then can tax religion? Twice? PIGOU taxes for religion. anyone?

At 9/24/2010 6:24 AM, Blogger juandos said...

"Close the loophole, increase enforcement, reward turning people in"...

Open the 'reality hole' sethstorm and let the fetid aroma of the real world come wafting through...

From the Cato Institute: Hike in Cigarette Tax Opens Door to Other Vices

From the Tax Foundation: Taxes on Cigarettes Increase Crime, Denied by ACS Spokesman

At 9/24/2010 7:18 AM, Blogger geoih said...

Quote from sethstorm: "Close the loophole, increase enforcement, reward turning people in."

A siren song to all budding tyrants.

At 9/24/2010 8:44 AM, Blogger bob wright said...

Two words: Static & Dynamic

Many politicians live in a surreal, static world.

Reality is dynamic.

At 9/25/2010 2:34 PM, Blogger Unknown said...

It's interesting that, despite a tax increase, total cigar sales have also increased. Could we classify cigars as one of the elusive Giffin Goods?

At 9/25/2010 5:17 PM, Blogger morganovich said...

and if you untax something, you get more of it:

hong kong recently dropped all taxes on wine and went from being nowhere in the wine world to being the most important auction site in the world.


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