Taxation on Cigarettes

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Recommended: Government intervention in the market

The federal tax on tobacco products and in particular, cigarettes, has received considerable debate in both the United States House and Senate. At this time, the proposed new tax rate is $1.00 per pack or an increase of 61 cents. The current federal tax on a single pack of cigarettes is 39 cents (Tobacco Free Kids, 2007). Congress last voted to raise the tax on cigarettes in 1997 when it passed a 15-cent increase. This tax went into effect in January 2000 by 10 cents and the additional 5 cents followed in January 2002. This is a selective excise tax. The first federal tax of cigarettes occurred in 1960. The amount was 8 cents while the cost of a pack of cigarettes was 28 cents. The tax was one-third the price paid by consumers. At present, the average price of a pack of cigarettes is $4.00 with the 39-cent tax accounting for 10 per cent of the cost. To return to the 31 per cent rate of 1960, the federal tax would require an increase of 94 cents per pack. Additionally the federal tax on cigarettes has not kept up with the consumer price index. For the government to alter this situation, the proposed tax increase would have to be $1.12 per pack. In contrast, the tax on cigarettes in foreign countries ranges from more than $2.00 to almost $10.00 per pack. The expected benefits from an increase in the tax would be additional revenues of $9.4 billion, decline in cigarette sales and a decrease in youth sales. “The general consensus is that every 10 percent increase in the real price of cigarettes reduces overall cigarette consumption by approximately three to five percent, reduces the number of young-adult smokers by 3.5 percent, and reduces the number of kids who smoke by six or seven percent.” (Tobacco Free Kids.org, 2007) Th... ... middle of paper ... ...hose who are unable to purchase them at this price will be forced to stop smoking, which in turn will bring down prospective healthcare costs in our country. References Campaign for Tobacco Free Kids. (2007). Higher cigarette taxes reduce smoking, save lives, save money. Retrieved January 27, 2008 from http://tobaccofreekids.org/reports/prices/ Entin, Stephen. J. (2004). Tax Incidence, Tax Burden, and Tax Shifting: Who really pays the tax? Retrieved January 24, 2008 from http://www.heritage.org/research/taxes/cda04-12.cfm Fleenor, Patrick. (2007). SCHIP, Cigarette Taxes and Crime. Retrieved January 27, 2008, from http://www.taxfoundation.org/blog/show/22484.html SparkNotes LLC. (2006). Equilibrium: Government Intervention with Markets. Retrieved January 27, 2008 from http://www.sparknotes.com/economics/micro/supplydemand/equilibrium/section2.rhtml

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