Criteria for determining an optimal cigarette tax: the economist's perspective

In the debate on cigarette taxation, both supporters and opponents of higher taxes often appeal to economic theory and analysis. To evaluate the criteria for defining an optimal cigarette excise tax from the perspective of economics, the Office on Smoking and Health of the US Centers for Disease Control and Prevention convened a meeting of economists on 5 May 1995. Meeting participants acknowledged that, by itself, neither the discipline of economics nor any other could determine what is socially "right" or "wrong". However, the economist's understanding of efficiency and equity in the workings of the marketplace can inform the debate, offering insights relevant to assessing the merits of tax proposals and of arguments supporting or opposing such proposals. In this paper, the efficiency and equity considerations that economists use in evaluating the desirability of a tax are described and applied to the case of cigarettes. It is concluded that at present neither the arguments of tax increase advocates nor those of opponents are well grounded in economic analysis per se. Additional research based knowledge of the costs imposed on people other than the immediate consumers of cigarettes, especially those related to environmental tobacco smoke, is needed, as is further understanding of children's responsiveness to cigarette price changes. Protection of children constitutes the strongest argument favouring increased taxation of cigarettes.