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Playing with Fire: Cigarettes, Taxes, and Competition from the Internet

  • Austan Goolsbee
  • Michael F. Lovenheim
  • Joel Slemrod

This paper documents the rise of the Internet as a source of state tax-free cigarettes and its impact on taxed sales elasticities. Using data on cigarette tax rates, taxable cigarette sales and individual smoking rates by state from 1980 to 2005 merged with data on Internet penetration, this paper documents that there has been a substantial increase in the sensitivity of taxable cigarette sales to state tax rates that is correlated with the rise of Internet usage within states. The estimates imply that the increased sensitivity from cigarette smuggling over the Internet has lessened the revenue generating potential of cigarette tax increases significantly, although states are still far from the revenue-maximizing tax rates. (JEL D12, H25, H31, H71, L66)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/pol.2.1.131
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File URL: http://www.aeaweb.org/aej/pol/data/2007-0030_data.zip
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Article provided by American Economic Association in its journal American Economic Journal: Economic Policy.

Volume (Year): 2 (2010)
Issue (Month): 1 (February)
Pages: 131-54

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Handle: RePEc:aea:aejpol:v:2:y:2010:i:1:p:131-54
Note: DOI: 10.1257/pol.2.1.131
Contact details of provider: Web page: https://www.aeaweb.org/aej-policy
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  10. Brown, Jeffrey, 2000. "Does the Internet Make Markets More Competitive? Evidence from the Life Insurance Industry," Working Paper Series rwp00-007, Harvard University, John F. Kennedy School of Government.
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  14. Slemrod, Joel & Kopczuk, Wojciech, 2002. "The optimal elasticity of taxable income," Journal of Public Economics, Elsevier, vol. 84(1), pages 91-112, April.
  15. Keeler, Theodore E. & Hu, Teh-wei & Barnett, Paul G. & Manning, Willard G. & Sung, Hai-Yen, 1996. "Do cigarette producers price-discriminate by state? An empirical analysis of local cigarette pricing and taxation," Journal of Health Economics, Elsevier, vol. 15(4), pages 499-512, August.
  16. Thursby, Jerry G. & Thursby, Marie C., 2000. "Interstate Cigarette Bootlegging: Extent, Revenue Losses, and Effects of Federal Intervention," National Tax Journal, National Tax Association, vol. 53(n. 1), pages 59-78, March.
  17. Hu, Teh-Wei & Sung, Hai-Yen & Keeler, Theodore E, 1995. "The State Antismoking Campaign and the Industry Response: The Effects of Advertising on Cigarette Consumption in California," American Economic Review, American Economic Association, vol. 85(2), pages 85-90, May.
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  19. Marie C. Thursby & Jerry G. Thursby, 1994. "Interstate Cigarette Bootlegging: Extent, Revenue Losses, and Effects of Government Intervention," NBER Working Papers 4763, National Bureau of Economic Research, Inc.
  20. Jonathan Gruber, 2000. "Youth Smoking in the U.S.: Prices and Policies," NBER Working Papers 7506, National Bureau of Economic Research, Inc.
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