Sunday, November 22, 2009

Roll Your Own Tax Rate

New York Times editorial "Roll Your Own Tax Rate" (November 21st, 2009) misunderstands the idea that individuals are much better off, in general, when they are left free to choose their own utiility-maximizing bundle.

Obviously the new law is in urgent need of a no- nonsense amendment to bring roll-your-own under proper federal controls and full taxation. The companies plead they merely found a way to save their industry from taxes so prohibitive as to force them to close. That’s not a bad idea, given the public health findings about lethal smoking.

The editorial misses the same things doctors miss when they assume that the sole objective of individuals is to lengthen their life. Maximizing happiness over time involves both quantity of life and quality. If individuals were interested solely in lengthening their life, then they would not listen to music while driving, or, if a passenger would always take the back seat, which is safer. The marginal increase in safety is simply not worth the sacrifice.

Why would we assume that cigarettes are any different? Knowledge? Addiction? The 1997 National Survey indicates that individuals who smoke overestimate the risk level of lung cancer. The idea that individuals are not forward-looking when it comes to addiction is belied by a plethora of empirical evidence: individuals drop consumption of cigarettes now in response to a future tax increases (American Economic Review: Becker, Grossman and Murphy 1994).

The only option left for criticism is that we smoke because our social group lowers our overall utility but increases our marginal utility from smoking--a dubious proposition in the long run, given the physical and monetary cost of smoking and endogeneity of social groups.

No comments:

Post a Comment