April 14, 2002

How a Tax on Cigarettes Can Help The Taxed

By DAVID LEONHARDT

THE people who run the country's cities and states seem to have developed a new philosophy of government: when cash is short, hit up the smokers for more money.

In New York, Mayor Michael R. Bloomberg wants to raise the city's cigarette tax to $1.50 a pack, from just 8 cents. Knowing that most Americans' distaste for smoking outweighs their skepticism of new taxes, politicians from other states, including New Jersey and Connecticut, have made similar proposals in recent months.

But this approach has its own difficulties. A just society should not solve its problems by creating a group of pariahs and then overtaxing them. If the government does not have enough money to run its programs, one wonders if it should either rein in its ambitions or increase taxes for everybody.

Also, raising cigarette taxes instead of income or real-estate taxes, as Mayor Bloomberg wants to do, seems likely to hurt the poor and the middle class, who spend a greater portion of their income on cigarettes than the wealthy do.

But to a rapidly emerging field of economics, this analysis is all wrong. These economists make the counterintuitive argument that increasing cigarette taxes helps smokers more than anyone else.

To understand their position, start by thinking about the smokers you know (or yourself, if you are among the 20 percent or so of Americans who smoke). The chances are good that they have often said they would like to quit, and some have probably tried to do so more than once. In the end, though, short-term desire, or addiction, tended to trump long-term happiness.

For years, economists would have said that actions speak louder than words. Whatever smokers say about quitting, they are rationally deciding that the pleasure they derive from cigarettes exceeds their cost.

Jonathan Gruber was one of these economists when he worked in the Treasury Department in the Clinton administration. Mr. Gruber, a professor at the Massachusetts Institute of Technology, remembers telling other policy makers that economic theory says they should not increase cigarette taxes. People should be allowed to decide for themselves whether they want to smoke, he told his colleagues. Those who smoke may hurt themselves, but they will not drain the country's resources because so many of them will die before running up large Medicare bills.

Mr. Gruber called it his most embarrassing moment in government, and his discomfort with his own argument caused him to begin researching the issue when he returned to academia. The central question is whether smokers really do rationally weigh the pluses and minuses of smoking, as traditional economics would suggest.

TO find an answer, Mr. Gruber and Sendhil Mullainathan, another M.I.T. economist, studied surveys of Americans' and Canadians' reported happiness over the last 30 years. These surveys have become popular in the hot field of behavioral economics, whose followers say human beings do not always make rational choices.

Mr. Gruber and Mr. Mullainathan used about 10 variables that are correlated with smoking, including age, income, household size and religious observance, to identify who the smokers in the survey were thus catching former smokers as well. The two also collected data on changes in cigarette taxes in the United States and Canada.

While controlling for other variables, the two economists found that after cigarette taxes increased, unhappiness declined among the smoking subset, indicating that they had quit or cut down smoking and were pleased about it. The taxes are also less regressive than they appear, because poorer smokers are more likely to quit when the price increases.

Researchers already know that smokers are price-sensitive. Studies show that a 10 percent price increase produces about a 5 percent drop in smoking. The new work available at http://econ-www.mit.edu
/faculty/gruberj/ shows that taxes push people to take a step they had wanted to take before but couldn't.

"We all know smokers who really want to quit, but there is nothing in the private market that can force them to quit," Mr. Gruber said. "The government can provide that."

Some smokers, to be sure, do not want to quit, and they receive no benefit from higher taxes. But society still might. The Centers for Disease Control and Prevention said last week that the current level of cigarette taxes was not high enough to pay for the health problems caused by smoking.

The beauty of cigarette taxation is that it is among the few public policies that can both raise revenue and cut costs.


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