Do Cigarette Taxes Make Smokers Happier?

To measure how policy changes affect social welfare, economists typically look at how policies affect behavior, and use a formal model to infer welfare consequences from the behavioral responses. But when different models can map the same behavior to very different welfare impacts, it becomes hard to draw firm conclusions about many policies. An excellent example of this conundrum is the taxation of addictive substances such as cigarettes. Existing empirical evidence on smoking is equally consistent with two models that have radically different welfare implications. Under the rational addiction model, cigarette taxes make time consistent smokers worse off. But, under alternative time inconsistent models, smokers are made better off by taxes, as they provide a valuable self-control device. We therefore propose an alternative approach to assessing the welfare implications of policy interventions: examining directly the impact on subjective well-being. We do so by matching information on cigarette excise taxation to separate surveys from the U.S. and Canada that contain data on self-reported happiness. And we model the differential impact of excise taxes on those predicted to be likely to be smokers, relative to others, in order to control for omitted correlations between happiness and excise taxation. We find consistent evidence in both countries that excise taxes make predicted smokers happier. This evidence suggests that the time inconsistent model of smoking is more appropriate, and that as a result welfare is improved by higher cigarette taxes.

From Harm to Robustness: A Principled Approach to Vice Regulation

John Stuart Mill’s harm principle maintains that adult behavior cannot justifiably be subject to social coercion unless the behavior involves harm or a significant risk of harm to non-consenting others. The absence of harms to others, however, is one of the distinguishing features of many manifestations of “vices” such as the consumption of alcohol, nicotine, recreational drugs, prostitution, pornography, and gambling. It is with respect to vice policy, then, that the harm principle tends to be most constraining, and some current vice controls, such as prohibitions on drug possession and prostitution, violate Mill’s precept. In the vice arena, we seem to be willing to accept social interference with what Mill termed “self-regarding” behavior. But does that willingness then imply that any social intervention into private affairs is justifiable, that the government has just as much right to outlaw Protestantism, or shag carpets, or spicy foods, as it does to outlaw drugs? In this paper I argue that advances in neuroscience and behavioral economics offer strong evidence that vices and other potentially addictive goods or activities frequently involve less-than-rational choices, and hence are exempt from the full force of the harm principle. As an alternative guide to vice policy, and following some guidance from Mill, I propose the “robustness principle”: public policy towards addictive or vicious activities engaged in by adults should be robust with respect to departures from full rationality. That is, policies should work pretty well if everyone is completely rational, and policies should work pretty well even if many people are occasionally (or frequently) irrational in their vice-related choices. The harm and robustness principles cohere in many ways, but the robustness principle offers more scope for policies that try to direct people “for their own good,” without opening the door to tyrannical inroads upon self-regarding behavior

Do Cigarette Taxes Make Smokers Happier

Some policy makers justify cigarette taxes by arguing that they actually make smokers better off. This argument has been hard to evaluate because behavioral data, such as that showing reduced cigarette consumption following a tax hike, cannot resolve the issue of whether smokers are made better off by the reduction or not. In this paper, we directly assess the effect of cigarette taxes on well-being, using subjective well-being data. We model the differential impact of excise taxes on those with a propensity to smoke, relative to others, in order to control for omitted correlations between happiness and excise taxation. Using US data on happiness and state-level changes in excise taxes, we find consistent evidence that excise taxes make those who have a propensity to smoke happier. To assess robustness, we repeat the exercise using Canadian data, which has independent information on well-being and also much larger tax changes, and find the exact same pattern. Moreover, these impacts are present for cigarette excise taxes, but not for other excise taxes. These results suggest that the welfare effects of cigarette taxation are far more complex than simple rational economic models might predict.

Optimal Tax Levels and Tax Incidence for Cigarette Excise Taxation

participants at the NBER’s Public Economics program and the University of Kentucky for discussion. The views expressed herein are those of the authors and not necessarily those of the National Bureau of Economi