Here is an NYT summary of what it means:
…the law would give the F.D.A. power to set standards that could reduce nicotine content and regulate chemicals in cigarette smoke. The law also bans most tobacco flavorings, which are considered a lure to first-time smokers.
For purposes of argument, let's say you buy into paternalism and the government's ability to do a good job with it (no need to reargue those points in the comments, they are only simplifying assumptions for the purpose of focusing on another question).
My question is: why impose quality restrictions when higher taxes would appear to be more efficient in limiting consumption and raising revenue at the same time? Revenue is especially scarce right now and making cigarettes less appealing lowers the revenue that can be raised by taxing them.
Can you derive the conditions under which such a quality restriction might be efficient nonetheless? I see a few cases:
1. More government revenue is a bad thing.
2. You have a funny model where a quantity restriction serves as a non-convex "notch" incentive and has a more powerful disincentive effect, yet with lower deadweight loss, than the smoother incentive embedded in the higher tax-enhanced price. (Heterogeneous consumer groups can contribute toward such a result but these are exactly the kind of theory papers which many people hate.)
3. The black market is a big problem. Quality regulations mean that good black market cigarettes must be made with illegal inputs and thus those inputs can be detected at the factory source and also remain detectable throughout the life of the cigarettes.
What else am I missing? Overall, given the initial premises, I still suspect that higher taxes are a better policy than quality restrictions.
i don’t want the government to benefit from cigarette addiction, because it will incentivize the government to encourage cigarette addiction.
This may not be the most lucid post, but I’m having trouble organizing thoughts today. Apologies in advance.
I would support higher taxes instead of quality restrictions, but there’s the question of which course of policy will increase human welfare? A cigarette tax wouldn’t necessarily, say, decrease the level of addictive agents in a given smoke, so those who smoke would still find it difficult to quit.
Perhaps the optimal solution is to try to shift the demand curve with regulations (e.g., set quality limits on nicotine), increasing elasticity and making it more responsive to a Pigovian tax.
It guts product differentiation which in tun will reduce competition to price alone. This should reduce the profits made from selling the product. Small profits means less advertising and less political marketing (lobbyist). I assume the desire is to cripple the companies, reduce profits to growers, and eliminate money to fight back.
Taxes on a product with inelastic demand means that most of the costs of the tax is passed to consumers. That does not have as much direct impact on the profits of the producers.
This is an attempt to use the power of government to destroy an industry because they lack the political power to make the product illegal.
I don’t smoke, think no one should smoke, don’t invest in companies that make cigarettes. Still, I am scared by a government that targets a group of people with the intention of crippling them as a source of political opposition.
I think the idea might be that since smokers are fairly poor and cigarette taxes are regressive to find a non tax way to address the problem. I don’t think this is a good solution but it represents a plausible intent.
I don’t think the new standards can possibly result in anything but the banning of cigarettes. They’re poison. Everyone knows they are poison. If the FDA is honest they will now have to ban them because they are poison. Of course, the honesty of the FDA is an open question…
Alcohol is also a poison…
But I don’t blow my drink in other people’s faces.
Well, not usually.
As the article mentions, it is about reducing aggregate smoking and doing so by differentiating between two consumers, potential smokers and current smokers.
On the margin the quality policy aims to stop product differentiation. And, on the margin, product differentiation benefits producers mostly via capturing latent demand. Latent demand itself is largest in potential smokers. Reducing potential smoking may be the best margin to attack aggregate smoking.
Current smokers incentives are largely about quelling an addiction at the best price. Most probably current smokers instead make product substitutes in the face of taxes. “Trade downs” are more likely than quitting/reduction. Product differentiation is unlikely to woo them as they are stuck in their ways.
The latent demand argument may put a hitch in those who want to be persuaded by something empirical.
This is in addition to other incentives mentioned. But since we have so many good reasons for this policy, we know it is effective on some margin. Why is the taxes vs. regulation an either/or problem? If the government wants to reduce smoking, why should they solve for a huge investment in corner solution when the same could be accomplished in a diversified solution of smaller effects on several margins?
Arnie beat me to it. A lower nicotine dose per cigarette means higher, not lower sales. More cigarettes smoked probably means more exposure to carcinogens in the smoke — so worse public health but more revenue.
Of course, that’s all unless there are alternates sources. I have a friend who’s been filling his own tubes with inexpensive loose tobacco for years. But now that the taxes on loose tobacco have been jacked 2000%, he’s considering a tobacco garden and hanging leaves to dry in the garage (what’s the over/under on how long until the Feds try to ban/regulate tobacco seeds & homegrown tobacco)?
Isn’t there a unit issue here? People like one unit of everything, and don’t really adjust much for the size of that unit. (What was the study, one spoonful of M&Ms regardless of size)? If you can reduce the amount of problems from any one unit, it may be beneficial, working together with taxation.
In the UK, the tax authorities believe they’re pretty much at the top of the laffer curve for cigarette duties. I suspect duties are higher and smuggling is easier but if the US authorities believed the same thing then the revenue argument would obviously be invalid, and raising taxes might increase smoking by making cheap smuggled cigarettes more easily available.
The Obama administration likes new, or higher taxes, but they REALLY like telling people what to do.
I think the black market is key, but not for quite the same reason. I don’t know what the equivalent of the Laffer Curve for sales taxes is, but I believe we are near the top of the curve in the case of cigarettes. So increasing taxes from here neither increases revenues nor does it really decrease cigarette use.
Given that, the way to get everyone to smoke “good” cigarettes is to make the Good ones attractive to the producers. If taxes are lowish, then a producer can make lots of money selling only Good cigarettes and staying on the right side of the law. If taxes go higher, then the only way to make money as a producer is to be on the wrong side of the law, in which case you might as well sell the consumer what he wants, which is Bad cigarettes.
I’ll second (third?) arnie’s observation: lowering nicotine per cigarette may well increase consumption.
It guts product differentiation which in tun will reduce competition to price alone.
I don’t think the history of consumer goods bears this out. Differentiation just has to be carried out via marketing. To be fair, with the restrictions on cigarette advertising, it’s possible that avenue will be closed to the big manufacturers.
Well, first of all, cigarette taxes are targeted at the lowest income bracket. As a way of increasing revenue gathering in an undertaxed group, it probably works well, but at some point regressivity becomes cruelty, taking advantage of a mental or physical illness in order to gather revenue. As a progressive option, eliminating the entry points like flavored cigarettes would be a boon to that same class, reducing their taxes while improving their health. As fast as cigarette taxes have gone up lately, it’s very hard for me to see how they can continue without breaking some basic moral precepts about the treatment of the underclasses and the psychologically/physically dependent.
slowly raise taxes on cigarettes to Canadian levels (about $10/pack)
use the revenues to subsidize non-smoking programs, such as the Chantix drug, and marketing efforts to encourage quitting and support from friends/employers. pay teenagers to not smoke
Wow, more government involvement in private industry, goodie, now cigarette’s can be as dead to me as GM.
“If you’re going to nationalize the health care system, lowering the incidence of cancer is a worthy long-term goal to keep costs down.”
Mark,
How fashionably….national socialist:
http://www.amazon.com/Nazi-War-Cancer-Robert-Proctor/dp/0691070512/ref=sr_1_3?ie=UTF8&s=books&qid=1244824523&sr=8-3
Well, I don’t know if it has been mentioned yet, but mentholated cigarettes are still legal. Phillip Morris, the tobacco company that actually pushed this legislation doesn’t produce flavored cigarettes except for mentholated.
So this is a case of a dominant company striking out its competitor’s markets. The feds can justify it by saying flavored cigarettes are geared toward kids or whatever.
Accepting your ground-rules, the negatives of smoking are spread over many decades (health and cost) while the positive is instantaneous. People with high time preference need lower positives rather than higher negatives to manipulate. The alternative would be to make people buy smoking licenses up front.
It doesn’t seem like many of people here have read George Stigler.
Even to an undergrad student like myself, Phillip Morris’ lobbying for this bill is rather predictable, as is the “public interest” moniker this bill is running under. Unfortunately, regulation is far too often in the most competitive markets where the consumer is most protected. The result is government sanctioned monopolies at the expense of the consumer it claims to be protecting…
Higher taxes also impose an adverse effect on wealth.
AlexJ: Slocum, my wife said that her grandfather routinely grew and cured his own tobacco for personal use, even though his farm concentrated on other crops. Your friend’s plan is doable.
Oh, yes — definitely. He started Googling, and it’s pretty clear that grow-you-own is going to be a booming hobby.
Hank: …but at some point regressivity becomes cruelty, taking advantage of a mental or physical illness in order to gather revenue.
When you consider portion of family discretionary income a two-pack-a-day blue-collar smoker spends on his or her addiction, it’s already well past unconscionable, I think.
I think there are two dominant groups involved. Leaving aside the tobacco industry and the distribution channel.
Group 1: The “do gooders” who view cigarettes as an “evil” product that must be stamped out.
Group 2: The “utilitarians” who view cigarettes as a “revenue opportunity”.
Group 1 has been fighting for 30 years to get cigarettes regulated by the FDA. They view this as the next natural step on the road to marginalizing cigarette smoking. With the side benefit of destroying “big tobacco”. What’s their plan? Heavily taxed cigarettes manufactured at minimal profit and sold in government licensed retailers similar to state run liquor stores. No advertising, no sales promotions and no discounts. Packages limited to black on white type with the single word CIGARETTES and paragraphs of health warnings. Ultimately the consumers die out and the problem is “solved”. (Where I come from we call that a heroic assumption.)
Group 2 views cigarettes as a source of revenue. They are A Okay with the social opprobrium and restrictions as long as the cash cow continues to produce copious quantities of milk.
As long as group 2 views group 1′s demands as not impacting the cash flow, they will go along to get along.
I don’t smoke, so I’m just speculating, but I’d think the flavored smokes would be the low quality varieties, and Phillip Morris is simply trying to exploit their superior non flavored quality cigarettes by making them the only variety that can be manufactured legally.
That said, I’m sure there will be corner markets that specialize in dipping the plain cigarettes in various flavors to get around the ban.
I just dont get it???? Why not ban smoking. In fact, while we are it, why doesnt Obama just go “Demolition Man” style and simply ban red meat, contact sports, and any other risky human activity. After all, we are trying to help people.
The less nicotine -> higher sales argument may be accurate, but it is unclear that this would generate more revenue than higher taxes.
The regressive nature of the tax is more of a political point. If it were mostly rich people smoking cigarettes, higher taxes wouldn’t be as big of an individual objection. But if you’re at or below medium income, heavy taxes on cigarettes are going to motivate you to vote in new congressmen.
The best argument stems from market imperfections and government structural problems. It’s gotta be really, really hard to effectively tax additives. Information on their harm is likely to be incomplete. Efficient taxes may be so high as to generate a black market. New additives are likely to pop up like mushrooms if you only tax the existing ones, forcing new research and some delay before taxes can be levied on them. Worse, I don’t think the FDA has the power to simply create taxes. Each new additive tax would have to be approved by Congress. That’s just never going to happen. Even if it did, it would take so long there would be a new wave of additives available by the time it passed. Simply the difficulty of figuring out new taxes (let alone the difficulty of actually making those taxes into law) may make taxation unrealistically inefficient, at least with regards to additives.
Similarly, taxation on amounts of tobacco may lead to problems, since, as mentioned, it forces people to smoke more cigarettes for the same kick, which may lead to even more adverse health outcomes (though with admittedly higher revenue). If the damage caused by nicotine/cigarette does not scale linearly, or if consumer behaviour is hard to predict, optimal taxation may be difficult.
The reason for these regulations is to preempt state tort lawsuits against tobacco companies for misleading consumers about the health consequences of smoking and for manipulating the nicotine content of cigarettes. A tax wouldn’t have preemptive effect, and a separate law preempting these lawsuits would be politically unpalatable unless coupled with — as here — additional federal regulation of cigarette advertising and new regulation of cigarette content.
Because these lawsuits risk massive overdeterrence — any lawsuit can result in ruinous liability — the regulations are a better policy option than the lawsuits.
Taken from Greg Mankiw’s site:
“If we do nothing, within a decade we will be spending one out of every $5 we earn on health care. And in 30 years, we’ll be spending one out of every $3 we earn on health care. And that’s untenable. It’s unacceptable. I will not allow it as President of the United States.”
Read the last line. Everthing is about control.
Though I generally agree with you… I suppose a good reason would be a more prohibitive barrier to entry. An individual’s risk preferences might be motivated less by financial disincentives than by Big Bro’s admonishments. I think if you look at the decreased consumption of ecstasy pills, government’s interference might be largely responsible.
I agree with Tyler. Besides the obvious problem that just because FDA has the authority to regulate something doesn’t automatically mean they have the budget and manpower to do it, we need more revenues, and if we’re trying to engineer behavior in a way to improve public health, we should do it in a way that offsets the cost of doing it. Sin taxes are perfect. My suspicion is that the question of how to do it is political – put another tax on cigarettes, and the Democrats reinforce their reputation as taxers, especially among blue-collar Americans who smoke more.
I suspect the real explanation for quality restrictions rather than taxes is political. Many voters who might support the general paternalist project would still balk at the huge taxes necessary to achieve a similar effect.
Also it’s easier to ratchet down the nicotine level without being noticed than the taxes.
However, I can come up with a couple other consistent justifications.
1) (Perhaps your 2?) You view it as desirable to inhibit consumption more in one type of cigarette consumer than another. For instance you might believe it would be too cruel (or lead to rampant smuggling) to deny addicted smokers their fix but wish to deter new smokers.
Since new smokers may only purchase a small number of cigarettes they may not be strongly affected by taxes while the current addicts are. However, by increasing the ratio of unpleasant effects of cigarettes (coughing etc..) to pleasant ones (nicotine) one might think you are more effective at deterring them from smoking enough for addiction to kick in.
2) You realize that habit and placebo effects play a substantial role in addiction (e.g. persons on methadone maintenance are often placebo dosed after reaching 0 to avoid placebo based w/d effects). By decreasing cigarette quality you hope to achieve a one time decrease in daily nicotine dosage and thereby help current smokers quit.
3) Given the rapid metabolism of nicotine by the body you hope to decrease health effects (or addiction as in 1) by reducing the acute stress of high nicotine levels. In other words you think it is good for people to take longer to imbibe the same nicotine dose.
4) You fear that ultra high prices for cigarettes would make them a signal of affluence.
As interesting as the intellectual exercise was I want to add that I think reducing nicotine levels is likely to sentence smokers to earlier deaths. While nicotine likely contributes somewhat to the hazards of smoking it is the other components of smoke doing the majority of the damage. The net effect of this will be to cause millions of cigarette smokers to inhale more toxins to achieve their usual dose of nicotine.
What the FDA should do is to approve tobacco-less smoking products but between industry pressure and the desire of voters to express their moral condemnation of smoking it’s unlikely to happen.
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As an aside it really pisses me off when the media/politicians/experts assert the FDA will scientifically regulate tobacco. That’s pure BS. If the FDA ever tries to quantify the pleasure people get from smoking (or pain of quitting) I will fall off my chair.
All of this seems to assume that every person that smokes is addicted and smokes 1+ packs per day. When the truth is that many people smoke infrequently and are not addicted. Since the health effect of infrequent smoking are minor at worst, it seems unfair to punish them by *banning* cigarettes, whereas taxing them to increase there cost is a more reasonable approach.
Increasing taxes makes a cigarette habit very expensive, but individual cigarettes are cheap with or without taxes. The monetary cost of smoking your first 50 or 100 cigarettes is very low. So, if you want to discourage that early cigarette consumption you need to hit it on the quality margin, not the cost margin (partial smoking bans sort of work the same way). Obviously if people had rational expectations they would build in the future cost of smoking, but that model would seem to be…less applicable than normal here.
Tyler, you are also missing the regressive nature of the so-called sin taxes.
I would agree with #1, but I’d rather see more government revenue than more government governing, chi hair iron, especially given the deficit.
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