Political  Calculations

 Once upon a time, economist Arthur C. Pigou proposed that by imposing taxes upon things that might create excess social costs, those costs could be reduced.

Called a "Pigovian Tax", a classic example of this kind of tax in action would be the special excise taxes that many states impose upon tobacco products, where the excess social costs might be the increased spending for health care to deal with smoking-related ailments.

Here, if Pigou's taxes really work, we should see the consumption of tobacco products fall as the taxes imposed on them are raised substantially enough to affect the purchasing decisions of those who might consume them.

Let's use the state of Hawaii as a case study here, because Hawaii has been greatly increasing their taxes on tobacco products over the last several years. Here, the typical excise tax imposed by the upon a pack of cigarettes has increased from $1.00 in 2000 to $3.20 per pack in 2011, with 60% of that increase having taken place since 2008. During that same time, the federal excise tax on tobacco has increased from $0.34 per pack to $1.01 per pack, and the typical retail price of a pack of cigarettes in Hawaii has risen from $4.05 in 2000 to $9.27 in 2011.

Nominal Taxes and Retail Price of a Pack of Cigarettes in Hawaii, 2000-2011

But unlike every other state in the U.S., Hawaiians can't just jump in their cars and make a quick run for the border for the sake of buying bootleg tobacco products to avoid their state's very high tobacco taxes, which has risen to now rank fourth in the nation, behind only New York, Rhode Island and Connecticut.

Political Calculations

Political Calculations is a site that develops, applies and presents both established and cutting edge theory to the topics of investing, business and economics.

Be the first to read Political Calculation's column. Sign up today and receive Townhall.com delivered each morning to your inbox.


Get the best of Townhall Finance Daily delivered straight to your inbox

Follow Townhall Finance!