A Lesson on Taxes

This is from the Washington Times today:

[If New York City decided to increase its cigarette tax by another $5 per pack, would it gain more or less revenue from the extra tax?

Before you answer the question, you should know that New York City already has the highest combined state-local tax rate of $4.25 per pack while the national average state tax is $1.34 per pack, and South Carolina has the lowest tax in the nation of only 7 cents per pack. The bet is that New York would receive less rather than more tax revenue, because some smokers would decide to quit and many others would acquire their cigarettes legally or illegally from low-tax states (New York already has an enormous cigarette smuggling problem). The citizens, and even most of the politicians in New York City, understand that their cigarette tax is already too high to maximize tax revenue, but they argue the high tax discourages smoking and thus is justified on that basis.

The point is, you don't have to be an economist to understand that if you tax something, you tend to get less of it. Thus it makes good fiscal sense to tax products perceived as harmful, such as tobacco and alcohol, up to the point where the tax becomes so high that people engage in large-scale smuggling or produce the product themselves - moonshine stills, etc. Responsible government officials understand the behavioral response to tax rates and thus adjust their tax revenue forecasts to consider the economic disincentive effects as well as the tax avoidance and/or evasion effects. ]

Now that is very telling. I think most of you can figure out where i am going on this one. The hypocrisy in that is, the politicians raise taxes, on cigarettes, understanding that this will lead to people quitting smoking. Knowing that they will get less revenue and people will be discouraged from smoking. However these same politicians fail to recognize this straight forward logic when it comes to income. For decades conservatives and libertarians have said that high income tax rates will discourage earnings and therefore revenue and will cause people not to employ or innovate. And then all the liberals say 'oh no that won't happen.' Well if we use their logic in New York, they want to increase cigarette taxes to discourage smoking. They realize if they make smoking cheaper, more people will be inclined to stay or start smoking. That is more smokers, saved or created. Now back to out analogy, if you lower the income tax rates, what will happen? You will get more money, more wealth and success being generated which will lead to more jobs.

See how that works? That ladies and gentlemen right there is a simple but powerful lesson. See what smoking has helped us learn? However, politicians are not stupid. They know the flaw in their logic yet they some how use catchy phrases like; 'Change' or 'Hope' to draw away from those things.

Ask any liberal this, with the WaTimes excerpt and ask them what they think. Trust me they won't know how to answer. Or they'll tell you, here, i bet this is what they'll say. They tell you that it is some how different. Nope, it's simple economics.