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![handle is hein.taxfoundation/iretbyln0125 and id is 1 raw text is: July 20, 1987
No. 39
Op Ed
Don't Index Excises
Among the tax-raising gimmicks presented to the
tax-writing committees of the Congress is a harebrained
scheme to increase the excises on alcoholic beverages
and tobacco products and to index these taxes to the
Consumer Price Index. Tax indexing is supposed to
protect against inflation's increasing the rates and
burdens of taxes. This off-the-wall excise indexing
proposal would instead insure that the rates and burdens
of these taxes increase with inflation. It's an idea whose
time should never come.
It would be difficult for most of us to think of
anything in favor of making taxes go up automatically
with inflation, but the staff of the Congressional Joint
Committee on Taxation was able to dream up five
arguments for this plan. Weird notions often flourish in
the public policy forum, so let's get rid of these
arguments before they take hold.
One reason given for this plan is that higher excise
tax rates are appropriate now because the effective tax
rates on alcohol and tobacco products have fallen over
the years. Had these excises been indexed to the CPI,
their present rates would be much higher. The tax on a
package of cigarettes, for example, would be 34 cents
instead of 16 cents.
This is a wonderfully peculiar argument. Literally, it
says that if these excise tax rates had been raised in the
past, they would now be higher than they are. It's
difficult to dispute such elegant reasoning.
A related and equally elegant argument is that pro-
inflation indexing of excise tax rates would maintain
their real burden as the general price level rises. This is
undoubtedly true but maintaining the real burden of any
tax certainly is not a credible objective of tax policy.
No principle of taxation argues that the real value of
any tax should be maintained. On the contrary, good tax
policy should insulate tax rates and tax burdens from
inflation. In the case of selective excises, the most
distorting taxes in the federal tax system, the erosion of
their effective rates by inflation somewhat moderates the
adverse effects of these taxes. Arguing for pro-inflation
indexing of excises is arguing for increasing their
adverse economic effects.
Obviously sensitive to the charge that excise taxes are
regressive, the JCT staff observes that the regressivity
argument is less persuasive than one might think in the
case of the excises on alcoholic beverages and tobacco
products. The reason is that these taxes are imposed on
discretionary purchases instead of necessities.
This creaky old argument is as wrong as it can be.
There is no meaningful distinction between a necessity
and a discretionary purchase, i.e., a luxury -- something
that some people think other people should do without.
The distinction is relied on by elitist public policy
advocates who would like to impose their preferences on
others. The free market makes no such distinction.
Perhaps the argument seeks to distinguish between
necessities and discretionary purchases in terms of
differences in their elasticities of demand, i.e., the
amount of necessities people buy responds little to
changes in their prices while discretionary purchases are
much more sensitive to price changes. Should tax policy
be based on presumed differences in the price elasticities
of demand among products and service? If this were the
case, we should now be seeking to reduce the excise tax
rate on cigarettes for which the price elasticity of
demand is widely estimated to be quite low. Were they
tempted to make any such distinction, policy makers
would be well advised to recognize that price elasticities
are not constant; at different points on the demand
curve for any product or service, the price elasticity
differs. Lower its price enough and a necessity will
become a luxury, in these terms; raise its price enough
and a luxury will begin to look like a necessity.
The regressivity of a tax doesn't depend on whether
the taxed product or service is deemed to be a luxury or
a necessity. The burdens of the same amount of taxes
on different products or services purchased by a low
income person can't be distinguished on the basis of
whether the products are deemed to be luxuries or
necessities.
Are you ready for this one? Would you believe that
increasing the tobacco and alcohol excise taxes can be
justified as a means of imposing a user fee to offset the
costs of administering the programs of the Bureau of
Alcohol, Tobacco, and Firearms?
Excise taxes are excise taxes, no matter what name
you give them. Increasing the excise tax on cigarettes or
alcoholic beverages and using the revenues to finance a
government agency doesn't convert the excise into a user
fee. What services of BATF are demanded by tobacco
growers, cigarette manufacturers, tobacco wholesalers,
retailers, or cigarette smokers? If BATF didn't do what
it does, would any of the above look for a business
establishment to provide any of the BATF services? If
so, would they be willing to pay anything like the
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