American Economic Journal:
Economic Policy
ISSN 1945-7731 (Print) | ISSN 1945-774X (Online)
Playing with Fire: Cigarettes, Taxes, and Competition from the Internet
American Economic Journal: Economic Policy
vol. 2,
no. 1, February 2010
(pp. 131–54)
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)Citation
Goolsbee, Austan, Michael F. Lovenheim, and Joel Slemrod. 2010. "Playing with Fire: Cigarettes, Taxes, and Competition from the Internet." American Economic Journal: Economic Policy, 2 (1): 131–54. DOI: 10.1257/pol.2.1.131Additional Materials
JEL Classification
- D12 Consumer Economics: Empirical Analysis
- H25 Business Taxes and Subsidies including sales and value-added (VAT)
- H31 Fiscal Policies and Behavior of Economic Agents: Household
- H71 State and Local Taxation, Subsidies, and Revenue
- L66 Food; Beverages; Cosmetics; Tobacco; Wine and Spirits
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