IDEAS home Printed from https://ideas.repec.org/a/aea/aejpol/v2y2010i1p131-54.html
   My bibliography  Save this article

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

* This paper has been replicated

Author

Listed:
  • Austan Goolsbee
  • Michael F. Lovenheim
  • Joel Slemrod

Abstract

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)

Suggested Citation

  • Austan Goolsbee & Michael F. Lovenheim & Joel Slemrod, 2010. "Playing with Fire: Cigarettes, Taxes, and Competition from the Internet," American Economic Journal: Economic Policy, American Economic Association, vol. 2(1), pages 131-154, February.
    • Handle: RePEc:aea:aejpol:v:2:y:2010:i:1:p:131-54
    Note: DOI: 10.1257/pol.2.1.131
    as

    Download full text from publisher

    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/pol.2.1.131
    Download Restriction: no
    File URL: http://www.aeaweb.org/aej/pol/data/2007-0030_data.zip
    Download Restriction: Access to full text is restricted to AEA members and institutional subscribers.
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Thursby, Jerry G. & Thursby, Marie C., 2000. "Interstate Cigarette Bootlegging: Extent, Revenue Losses, and Effects of Federal Intervention," National Tax Journal, National Tax Association;National Tax Journal, vol. 53(1), pages 59-78, March.
    2. Gruber, Jonathan & Sen, Anindya & Stabile, Mark, 2003. "Estimating price elasticities when there is smuggling: the sensitivity of smoking to price in Canada," Journal of Health Economics, Elsevier, vol. 22(5), pages 821-842, September.
    3. Coats, R. Morris, 1995. "A Note on Estimating Cross-Border Effects of State Cigarette Taxes," National Tax Journal, National Tax Association, vol. 48(4), pages 573-84, December.
    4. 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.
    5. Jonathan Gruber & Botond Köszegi, 2001. "Is Addiction "Rational"? Theory and Evidence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(4), pages 1261-1303.
    6. Slemrod, Joel & Kopczuk, Wojciech, 2002. "The optimal elasticity of taxable income," Journal of Public Economics, Elsevier, vol. 84(1), pages 91-112, April.
    7. 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.
    8. Becker, Gary S & Grossman, Michael & Murphy, Kevin M, 1994. "An Empirical Analysis of Cigarette Addiction," American Economic Review, American Economic Association, vol. 84(3), pages 396-418, June.
    9. Keeler, Theodore E. & Hu, Teh-wei & Manning, Willard G. & Sung, Hai-Yen, 2001. "State Tobacco Taxation, Education and Smoking: Controlling for the Effects of Omitted Variables," National Tax Journal, National Tax Association, vol. 54(n. 1), pages 83-102, March.
    10. Jeffrey R. Brown & Austan Goolsbee, 2002. "Does the Internet Make Markets More Competitive? Evidence from the Life Insurance Industry," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 481-507, June.
    11. Jonathan Gruber, 2000. "Youth Smoking in the U.S.: Prices and Policies," NBER Working Papers 7506, National Bureau of Economic Research, Inc.
    12. Raj Chetty & Adam Looney & Kory Kroft, 2009. "Salience and Taxation: Theory and Evidence," American Economic Review, American Economic Association, vol. 99(4), pages 1145-1177, September.
    13. Farrelly, Matthew C. & Pechacek, Terry F. & Chaloupka, Frank J., 2003. "The impact of tobacco control program expenditures on aggregate cigarette sales: 1981-2000," Journal of Health Economics, Elsevier, vol. 22(5), pages 843-859, September.
    14. Matthew C. Farrelly & Terry F. Pechacek & Frank J. Chaloupka, 2001. "The Impact of Tobacco Control Program Expenditures on Aggregate Cigarette Sales: 1981-1998," NBER Working Papers 8691, National Bureau of Economic Research, Inc.
    15. 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.
    16. Ayda A. Yurekli & Ping Zhang, 2000. "The impact of clean indoor‐air laws and cigarette smuggling on demand for cigarettes: an empirical model," Health Economics, John Wiley & Sons, Ltd., vol. 9(2), pages 159-170, March.
    17. Coats, R. Morris, 1995. "A Note on Estimating Cross-Border Effects of State Cigarette Taxes," National Tax Journal, National Tax Association;National Tax Journal, vol. 48(4), pages 573-584, December.
    18. Lovenheim, Michael F., 2008. "How Far to the Border?: The Extent and Impact of Cross-Border Casual Cigarette Smuggling," National Tax Journal, National Tax Association;National Tax Journal, vol. 61(1), pages 7-33, March.
    19. Chaloupka, Frank J. & Warner, Kenneth E., 2000. "The economics of smoking," Handbook of Health Economics, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 29, pages 1539-1627, Elsevier.
    20. William N. Evans & Jeanne S. Ringel & Diana Stech, 1999. "Tobacco Taxes and Public Policy to Discourage Smoking," NBER Chapters, in: Tax Policy and the Economy, Volume 13, pages 1-56, National Bureau of Economic Research, Inc.
    21. James Poterba, 1999. "Tax Policy and the Economy, Volume 13," NBER Books, National Bureau of Economic Research, Inc, number pote99-2.
    22. 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.
    23. Keeler, Theodore E. & Hu, Teh-wei & Manning, Willard G. & Sung, Hai-Yen, 2001. "State Tobacco Taxation, Education and Smoking: Controlling for the Effects of Omitted Variables," National Tax Journal, National Tax Association;National Tax Journal, vol. 54(1), pages 83-102, March.
    24. Stehr, Mark, 2005. "Cigarette tax avoidance and evasion," Journal of Health Economics, Elsevier, vol. 24(2), pages 277-297, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. DeCicca, Philip & Kenkel, Donald & Liu, Feng, 2013. "Excise tax avoidance: The case of state cigarette taxes," Journal of Health Economics, Elsevier, vol. 32(6), pages 1130-1141.
    2. Lovenheim, Michael F., 2008. "How Far to the Border?: The Extent and Impact of Cross-Border Casual Cigarette Smuggling," National Tax Journal, National Tax Association;National Tax Journal, vol. 61(1), pages 7-33, March.
    3. Chiou, Lesley & Muehlegger, Erich, 2008. "Crossing the Line: The Effect of Cross Border Cigarette Sales on State Excise Tax Revenues," Working Paper Series rwp08-012, Harvard University, John F. Kennedy School of Government.
    4. Stehr, Mark, 2005. "Cigarette tax avoidance and evasion," Journal of Health Economics, Elsevier, vol. 24(2), pages 277-297, March.
    5. Gruber, Jonathan & Sen, Anindya & Stabile, Mark, 2003. "Estimating price elasticities when there is smuggling: the sensitivity of smoking to price in Canada," Journal of Health Economics, Elsevier, vol. 22(5), pages 821-842, September.
    6. Lovenheim, Michael F. & Slemrod, Joel, 2010. "The fatal toll of driving to drink: The effect of minimum legal drinking age evasion on traffic fatalities," Journal of Health Economics, Elsevier, vol. 29(1), pages 62-77, January.
    7. Chiou Lesley & Muehlegger Erich, 2008. "Crossing the Line: Direct Estimation of Cross-Border Cigarette Sales and the Effect on Tax Revenue," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 8(1), pages 1-41, December.
    8. James E. Prieger & Jonathan Kulick, 2018. "Cigarette Taxes And Illicit Trade In Europe," Economic Inquiry, Western Economic Association International, vol. 56(3), pages 1706-1723, July.
    9. Lesley Chiou & Erich Muehlegger, 2014. "Consumer Response to Cigarette Excise Tax Changes," National Tax Journal, National Tax Association;National Tax Journal, vol. 67(3), pages 621-650, September.
    10. Chin W. Yang & Hui Wen Cheng & Ching Wen Chi & Bwo-Nung Huang, 2016. "A Tax Can Increase Profit of a Monopolist or a Monopoly-like Firm: A Fiction or Distinct Possibility?," Hacienda Pública Española / Review of Public Economics, IEF, vol. 216(1), pages 39-60, March.
    11. Goel, Rajeev K. & Payne, James E. & Saunoris, James W., 2016. "Spillovers from the beer market to U.S. cigarette demand," Economic Modelling, Elsevier, vol. 55(C), pages 292-297.
    12. Jonathan Gruber & Jonathan Zinman, 2000. "Youth Smoking in the U.S.: Evidence and Implications," NBER Working Papers 7780, National Bureau of Economic Research, Inc.
    13. Courtemanche, Charles, 2009. "Rising cigarette prices and rising obesity: Coincidence or unintended consequence?," Journal of Health Economics, Elsevier, vol. 28(4), pages 781-798, July.
    14. Abdulbaki Bilgic & Wojciech Florkowski & Cuma Akbay, 2010. "Demand for cigarettes in Turkey: an application of count data models," Empirical Economics, Springer, vol. 39(3), pages 733-765, December.
    15. Rajeev K. Goel & Michael A. Nelson, 2006. "The Effectiveness of Anti‐Smoking Legislation: A Review," Journal of Economic Surveys, Wiley Blackwell, vol. 20(3), pages 325-355, July.
    16. Thomas Y. Mathä & Alessandro Porpiglia & Michael Ziegelmeyer, 2017. "Cross-border commuting and consuming: an empirical investigation," Applied Economics, Taylor & Francis Journals, vol. 49(20), pages 2011-2026, April.
    17. Christian Ben Lakhdar & Nicolas Gérard Vaillant & François-Charles Wolff, 2016. "Does smoke cross the border? Cigarette tax avoidance in France," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 17(9), pages 1073-1089, December.
    18. repec:mea:meawpa:14284 is not listed on IDEAS
    19. Bishop, James, 2015. "Interacting effects of state cigarette taxes on smoking participation," MPRA Paper 66609, University Library of Munich, Germany.
    20. Mark Stehr, 2007. "The effect of cigarette taxes on smoking among men and women," Health Economics, John Wiley & Sons, Ltd., vol. 16(12), pages 1333-1343.
    21. Anger, Silke & Kvasnicka, Michael & Siedler, Thomas, 2011. "One Last Puff? Public Smoking Bans and Smoking Behavior," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 30(3), pages 591-601.

    Replication

    This item has been replicated by:
  • Emily Satterthwaite, 2018. "Replication of Goolsbee, Lovenheim, and Slemrod’s “Playing with Fire: Cigarettes, Taxes, and Competition from the Internet†(American Economic Journal: Economic Policy, 2010)," Public Finance Review, , vol. 46(5), pages 879-885, September.

    • More about this item

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • L66 - Industrial Organization - - Industry Studies: Manufacturing - - - Food; Beverages; Cosmetics; Tobacco

    Lists

    This item is featured on the following reading lists, Wikipedia, or ReplicationWiki pages:
    1. Playing with Fire: Cigarettes, Taxes, and Competition from the Internet (American Economic Journal: Economic Policy 2010) in ReplicationWiki

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aea:aejpol:v:2:y:2010:i:1:p:131-54. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Michael P. Albert (email available below). General contact details of provider: https://edirc.repec.org/data/aeaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.