The House bill doubles cigarette taxes from $1/pack to $2/pack and raises other tobacco taxes. The direct effect of this is regressive but the indirect effects are much larger, more important and very progressive--conferring larger health gains for lower-income households. A 🧵.
I addressed this issue in a speech I gave when I was at CEA arguing that the tobacco taxes disproportionately benefit lower-income households.
To fully analyze it we need to understand four components:
1. The direct effect. This is regressive because lower-income people smoke more and thus end up paying more in taxes.
(Technical aside: The incidence of the tax is likely partly but not fully on consumers because contrary to conventional wisdom demand is not inelastic.)
2. The effects on health. I estimated that the 2009 tax increase from $0.39/pack to $1.00/pack saved 15-70K lives per cohort. Most of those lives were lower-income people. This legislation would save a similar number of lives.
3. The cost of reduced pleasure from smoking. This is tricky.
On the one hand, if people are rational & tobacco not addictive then the cost of reduced pleasure from smoking would almost exactly offset the health benefits--if not people would not have been smoking.
On the other hand, some dismiss the pleasure of smoking entirely and do not believe that its loss should count for anything.
While I personally find smoking revolting, I place enough weight on de gustibus non est disputandum that I think it is wrong to entirely disregard.
I don't have a great solution to this tricky question but one rough guess might be to count 1/4 of the health benefits as a utility offset from lost pleasure from smoking. It is not all because people systematically underestimate how hard it will be to quit because of addiction.
4. The uses of the revenue. It is a mistake to analyze the distribution of one piece of a larger package on its own. If tobacco taxes pay for preschool then the benefits of that preschool should be counted in the distribution too.
Here is a rough and somewhat illustrative distributional analysis of the 2009 tobacco tax increase progressively adding these four different aspects. The current proposal would have similar characteristics.
Finally, I don't know how to interpret President Biden's $400K pledge so I'm not making a legalistic argument about whether or not this violates the pledge. But it undoubtedly would save tens of thousands of lives and confer a very progressive set of benefits--and fund even more.
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Retail sales out this morning (I'm a bit late to it). Surprisingly strong:
--Nominal sales up 0.7% (that's A LOT for a single month, especially when they were already well above trend).
--Spending at restaurants and bars was flat in August and 1.4% higher than June.
Stepping back for the bigger picture, nominal retail sales are 14% above trend. The majority of that is prices but the quantity (real retail sales) is still 6% above trend.
Reminder: these data are ~half of consumption & are miss most services, which are still below trend.
The huge spending bump on cars and parts is now over and instead we're just left with a large spending bump. But that spending bump is all to cover the higher prices, adjusted for inflation they are lower than they were pre-pandemic. Is the opposite of pent-up demand.
August CPI is out, most benign headline reading since January... but in a reversal from previous months the underlying trends were somewhat worse than the headline.
The underlying trend many have focused on was about the same as previous months.
In August some of the temporary factors driving up inflation went into reverse either because they had overshot the mark (used car prices -1.5% in Aug & car and truck rental -8.5%) or because the delta resurgence temporarily dampened prices (airlines -9.1% & hotels -3.3%).
Inflation from February to July was extraordinarily high: core CPI rose at an 8.0% annual rate. We always knew that inflation would not continue at an 8.0% annual rate. The question is will it slow to something like 2% (the Fed's view) or something meaningfully higher (my view).
American consumers seemed largely unphased by the Delta Variant in July. We'll see if that holds up in August--and could debate whether it is a good or bad thing.
Large increases in spending on restaurants, hotels, movie theaters, and other pandemic-related categories.
The economy continued to rebalance from goods spending (which remains high relative to trend) & towards services spending (which remains low). Some notable services (real):
Food services: +0.8%
Hotels and motels: +8.5%
Transportation: +3.3%
Movie theaters: +13.4%
Notably, people in July at out slightly *more* than would have been expected absent the pandemic. Maybe they were making up for lost time (pent up demand in services???), maybe it's more takeout, but also consistent with higher incomes.
Your updated inflation scorecard. For the median inflation expectations by the FOMC to be correct we would need to see prices *fall* between July and December. We've essentially had all of the inflation they predicted for the year in just seven months.
(Technical note: The FOMC, like the Fed staff & many other forecasters, projects Q4/Q4. On a monthly basis we've had slightly less inflation than they forecast for the yr but when you look at how the quarterly numbers shake out would need slightly negative to hit their forecast.)
Inflation has well more than made up for its misses during the pandemic. In fact, it has made up for all of its misses since 2015.
I am beyond thrilled the President Biden is taking the long overdue step to adjust the Thrift Food Plan to be in line with the increased cost of healthy food. This is a large advance for poverty reduction, nutrition and opportunity for children.
In a 2015 CEA report we explained why the long-standing practice of updating the Thrifty Food Plan, the basis for the SNAP benefits, by inflation was an inadequate reflection of the increased cost of a nutritious meal. I'll list the reasons in this thread. obamawhitehouse.archives.gov/sites/whitehou…
1. VARIETY & PALATABILITY. The TFP departs sharply from avg food consumption. The TFP assumes consumption of foods like beans, whole wheat pasta, etc. 20X the average American consumption, while assuming near-zero consumption of some healthful foods that Americans eat regularly.
In 2009 critics of the ACA made a lot of arguments but I don't recall any of them being that it would cause inflation.
Same thing in 2017, the TCJA threw a lot of money into an economy that many thought was at/close to full employment, but none of the critics argued inflation.
I've been debating different fiscal proposals for the last twenty-five years. And in virtually none of them was inflation an argument for or against it. For good reason--over the medium-term it is largely a monetary policy responsibility (with one caveat below).
In fact I can't remember a fiscal debate from the 1980s through the American Rescue Plan in which inflation figured in a meaningful manner, whether it was budget cuts or budget increases.