The Proposed New York
City Cigarette Tax Increase
Summary of main article
Under a proposal by Mayor Michael Bloomberg (pic), the New York City cigarette excise tax will rise from 8¢ per pack to a $1.50 per pack – an astounding 1,775% increase. Coupled with the state tax of $1.50 (effective April 3, 2002), NYC consumers would face state and city taxes of $3.00 a pack. The City tax would be 3 times as large as the average state tax and approximately 5 times as high as any municipal tax in the country. NYC prices would be nearly $6.80 per pack, making a pack of cigarettes about 50% more expensive than an ounce of silver. The typical NYC smoker would pay roughly $1,400 per year in NYC and NY State cigarette taxes.
Does
increasing taxes for cigarettes affect both cigarettes sellers and buyers? What
are taxes actually? These are some of the frequent questions that arise among
us about taxes. First of all, let’s get to know the definition of tax. Tax is a pecuniary burden laid upon individuals or
property owners to support the government. It is to impose a financial charge
or other levy upon a taxpayer. When the government imposes a tax on the sale of
a good, in this case – cigarettes; the price paid by buyers might rise by the
full amount of the tax, by a lesser amount, or not at all. For example, if the
price paid by cigarettes buyers rises by the full amount of the tax, then the
burden of the tax falls entirely on buyers. If the price paid by cigarettes buyers
rises by a lesser amount than the tax, then the burden of the tax falls partly
on buyers and partly on sellers of cigarettes. And if the price paid by cigarettes
buyers doesn't change at all, then the burden of the tax falls entirely on the
cigarettes sellers.
A Tax on
Sellers
The effects of this tax causes on the sellers of
cigarettes can be seen, on the demand and supply in the market for cigarettes. In
the graph below, the demand curve is D, and the supply curve is S. With no tax,
the equilibrium price is $3 per pack and 350 million packs a year
are bought and sold. A tax on sellers is like an increase in cost, so it
decreases supply. In order to determine the position of the new supply curve,
we add the tax to the minimum price that sellers are willing to accept for each
quantity sold. You can see that without the tax, sellers are willing to offer
350 million packs a year for $3 a pack. So with a $1.50 tax, they will offer
350 million packs a year only if the price is $4.50 a pack. The
supply curve shift from S to S + tax on sellers.. Equilibrium (e)
occurs when the new supply curve intersects the demand curve at 325 million packs
a year. The prices paid by buyers rises by $1 to $4 a pack. And the price
received by sellers falls by 50¢ to $2.50 a pack. So buyers pay $1 of the tax and
sellers pay the other 50¢.
A Tax on Buyers
A tax on buyers lowers the amount they are willing to
pay sellers, so it decreases demand and shifts the demand curve leftward. To
determine the position of this new demand curve, we need to subtract the tax
from the maximum price that buyers are willing to pay for each quantity bought.
As seen in the graph below, that without the tax, buyers are willing to buy 350
million packs a year for $3 a pack. So with a $1.50 tax, they are willing
to buy 350 million packs a year only if the price including the tax is $3 a
pack, which means that they’re willing to pay sellers only $1.50 a pack. The
demand curve shift from D to D – tax on buyers. Equilibrium (e)
occurs when the new demand curve intersects the supply curve at a quantity of 325
million packs a year. The price received by sellers is $2.50 a pack, and the
price paid by buyers is $4.
Taxes and Fairness
The
benefits principle is the proposition that people should pay taxes equal to the
benefits they receive from the services provided by government. For example, CEO’s
pays a higher tax to the government because of their positions at the high
level of the corporate business world – higher income while construction
workers pays considerably less tax since they earn considerably less. Another example would be, according to the article, is that higher taxes would be imposed on cigarettes sellers who bought a large number of cigarettes packs than those who bought much smaller packs that to be sold. This arrangement is fair because it means that
those who benefit most pay the most taxes. It makes tax payments and the
consumption of government-provided services similar to private consumption
expenditures. The ability-to-pay principle is the proposition that people should
pay taxes according to how easily they can bear the burden of the tax. For
example, a rich person can easily bear the burden than a poor person can, so
the ability-to-pay principle can reinforce the benefits principle to justify
high rates of income tax on high incomes.
Therefore, increasing the taxes on cigarettes
actually affect both the cigarettes buyers and sellers. For instance, for
cigarettes sellers, without the tax, they are willing to offer 350 million
packs per year for $3 a pack. So with a $1.50 tax, cigarettes sellers are only
willing to offer 350 million packs per year only if the price is $4.50 a pack.
Meanwhile, for cigarettes buyers, without the tax, they are willing to buy 350
million packs per year for $3.00 a pack. So with a $1.50 tax, cigarettes buyers
are only willing to buy 350 million packs a year only if the price including
the tax is $3 a pack, which means that they’re willing to pay sellers only
$1.50 a pack.
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