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Do Cigarette Taxes Make Smokers Happier

  • Gruber Jonathan H

    ()

    (MIT)

  • Mullainathan Sendhil

    ()

    (Harvard University)

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.

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Article provided by De Gruyter in its journal The B.E. Journal of Economic Analysis & Policy.

Volume (Year): 5 (2005)
Issue (Month): 1 (July)
Pages: 1-45

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Handle: RePEc:bpj:bejeap:v:advances.5:y:2005:i:1:n:4
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  1. Gary S. Becker & Kevin M. Murphy, 1986. "A Theory of Rational Addiction," University of Chicago - George G. Stigler Center for Study of Economy and State 41, Chicago - Center for Study of Economy and State.
  2. Robert J. MacCulloch & Rafael Di Tella & Andrew J. Oswald, 2001. "Preferences over Inflation and Unemployment: Evidence from Surveys of Happiness," American Economic Review, American Economic Association, vol. 91(1), pages 335-341, March.
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  7. Frank J. Chaloupka & Kenneth E. Warner, 1999. "The Economics of Smoking," NBER Working Papers 7047, National Bureau of Economic Research, Inc.
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  9. Ted O'Donoghue & Matthew Rabin, 1996. "Doing It Now or Later," Discussion Papers 1172, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  10. Jonathan Gruber & Botond Köszegi, 2001. "Is Addiction "Rational"? Theory And Evidence," The Quarterly Journal of Economics, MIT Press, vol. 116(4), pages 1261-1303, November.
  11. Easterlin, Richard A., 1995. "Will raising the incomes of all increase the happiness of all?," Journal of Economic Behavior & Organization, Elsevier, vol. 27(1), pages 35-47, June.
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