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Smoking: taxing health and Social Security

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  • Brian S. Armour
  • M. Melinda Pitts

Abstract

While the health risks associated with smoking are well known, the impact on income distributions is not. This paper extends the literature by examining the distributional effects of a behavioral choice, in this case smoking, on net marginal Social Security tax rates (NMSSTR). The results show that smokers, as a result of shorter life expectancies, incur a higher NMSSTR than nonsmokers. In addition, as low-earnings workers have a higher smoking prevalence than high-earnings workers, smoking works to widen the income distribution. This higher tax rate could have implications for both labor supply behavior and Social Security system funding.

Suggested Citation

  • Brian S. Armour & M. Melinda Pitts, 2006. "Smoking: taxing health and Social Security," FRB Atlanta Working Paper 2006-12, Federal Reserve Bank of Atlanta.
  • Handle: RePEc:fip:fedawp:2006-12
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    References listed on IDEAS

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    1. Garrett, Daniel M, 1995. "The Effects of Differential Mortality Rates on the Progressivity of Social Security," Economic Inquiry, Western Economic Association International, vol. 33(3), pages 457-475, July.
    2. Feldstein, Martin & Samwick, Andrew A., 1992. "Social Security Rules and Marginal Tax Rates," National Tax Journal, National Tax Association, pages 1-22.
    3. Feldstein, Martin & Liebman, Jeffrey B., 2002. "Social security," Handbook of Public Economics,in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324 Elsevier.
    4. Brian S. Armour & M. Melinda Pitts, 2002. "Incorporating insurance rate estimates and differential mortality into net marginal Social Security tax rate calculations," FRB Atlanta Working Paper 2002-29, Federal Reserve Bank of Atlanta.
    5. John B. Shoven & Jeffrey O. Sundberg & John P. Bunker, 1987. "The Social Security Cost of Smoking," NBER Working Papers 2234, National Bureau of Economic Research, Inc.
    6. Alan L. Gustman & Thomas L. Steinmeier, 2002. "The New Social Security Commission Personal Accounts: Where Is the Investment Principal?," NBER Working Papers 9045, National Bureau of Economic Research, Inc.
    7. Brian S. Armour & M. Melinda Pitts, 2004. "Incorporating Insurance Rate Estimates and Differential Mortality into the Net Marginal Social Security Tax Rate Calculation," Public Finance Review, , vol. 32(6), pages 588-609, November.
    8. Brittain, John A, 1972. "The Incidence of the Social Security Payroll Tax: Reply," American Economic Review, American Economic Association, pages 739-742.
    9. David R. Weir & Robert J. Willis & Purvi A. Sevak, 2002. "The Economic Consequences of Widowhood," Working Papers wp023, University of Michigan, Michigan Retirement Research Center.
    10. Gary V. Engelhardt & Jonathan Gruber, 2004. "Social Security and the Evolution of Elderly Poverty," NBER Working Papers 10466, National Bureau of Economic Research, Inc.
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