Question

The federal government imposes a tax on sales of cigarettes. The federal Centers for Disease Control and Prevention compiled the data shown in the following table. \begin{tabular}{l|l} \multicolumn{2}{c} { Percentage of Adults Who Are Current Cigarette Smokers, 2015 } \\ \hline At or above the poverty level & \(15.5 \%\) \\ \hline Below the poverty level & \(29.5 \%\) \\ \hline \end{tabular} Based on these data, is the federal cigarette tax progressive or regressive? Be sure to define progressive tax and regressive tax in your answer.

Short answer

Based on the percentage of smokers both at or above and below the poverty level and understanding of regressive and progressive tax, it can be concluded that the federal cigarette tax is considered to be a regressive tax.

Step-by-step solution

Analyze the Percentages

Study the table and identify that 15.5% of those at or above the poverty line are smokers, while 29.5% of those below the poverty line are smokers. There are significantly more smokers below the poverty line than at or above the poverty line.

Consider the Definition of a Regressive Tax

Remember the definition of a regressive tax: this type of tax takes a larger percentage of income from low-income earners than from high-income earners. Since the percentage of smokers is higher among people below the poverty line, the cigarette tax takes a larger proportion of their income, therefore, this tax is regressive.

Conclude

Based on the data given, and the understanding of progressive and regressive tax, one can conclude that the federal cigarette tax is regressive because it affects a larger percentage of people who are below the poverty line.

Key concepts

Understanding Progressive Tax

Progressive taxation is a core concept in contemporary fiscal policy. At its heart, a progressive tax system is designed to collect more taxes from high-income earners than from low-income earners, proportionally to their income. This approach is underpinned by the belief that those who have greater financial resources should contribute a larger share of their income to support the governmental expenses and social services.

For instance, in a progressive tax system, a person earning \(20,000 might be taxed at a rate of 10%, therefore paying \)2,000 in taxes. In contrast, a person earning \(200,000 might be taxed at a rate of 30%, resulting in \)60,000 paid in taxes. In this way, the tax rate increases as the taxable income increases, which theoretically reduces the tax burden on individuals with lower income.

It's important to differentiate between tax rate and tax amount here. Everyone, regardless of income, might pay the same amount on the first $20,000 of income. It's the additional income that's taxed at a higher rate for those earning more.

Cigarette Tax Impact

Cigarette taxes are a type of excise tax levied on tobacco products. While ostensibly aimed at reducing tobacco consumption due to associated health costs, these taxes have different implications across social and economic strata. It's well-documented that higher taxes on cigarettes can lead to reduced smoking rates. However, the impact is not uniform across all income groups.

People with lower incomes tend to be more sensitive to price changes because cigarettes comprise a larger share of their total spending. When tax increases make cigarettes more expensive, it may either reduce the number of cigarettes consumed or impose a greater financial burden on those who continue to smoke. Given that the prevalence of smoking tends to be higher among people with lower incomes, these taxes can be regressive—placing a disproportionate financial strain on lower-income individuals. This approach, while it encourages some to quit, may inadvertently exacerbate financial stress for those less likely to do so due to addiction or lack of access to cessation resources.

Poverty Level and Taxation

The relationship between poverty levels and taxation is a compelling consideration in shaping tax policy. Taxes play a fundamental role in determining the disposable income of individuals, especially those near or below the poverty line. A regressive tax system, wherein low-income earners are taxed at higher effective rates than high-income earners, can deepen economic inequalities and perpetuate poverty.

In the context of cigarette taxes, as indicated by the federal data, the higher percentage of smokers amongst individuals below the poverty line translates to a greater impact on their already constrained finances. This challenges the notion of tax fairness and puts into question the effectiveness of such taxes as a public health measure. Furthermore, this may lead to a heavier financial strain on those who can least afford it, potentially negating some of the progress made by social aid programs designed to lift individuals out of poverty.

It's crucial for policymakers to weigh the health benefits of excise taxes against their potentially regressive nature, crafting legislation that can alleviate rather than compound the fiscal challenges faced by those in lower economic brackets.