President Clinton has seized upon the cigarette excise tax as an expedient and politically correct means of
Question:
President Clinton has seized upon the cigarette excise tax as an expedient and politically correct means of increasing federal revenue. In 1994 the federal government took in $12 billion from the present 24-cents-per-pack tax. If the tax were quadrupled to $1 a pack, Clinton figures tax revenues would increase by more than $50 billion over three years. Those added revenues would help finance the health care reforms the president so dearly wants.
Professor Gary Becker, a Nobel Prize-winning economist at the University of Chicago, says Clinton's math is wrong. The White House assumed that cigarette sales would drop by 4 percent for every 10 percent increase in price. Professor Becker says that reflects only the first-year response to higher prices, not the full adjustment of smokers' behavior. Over a three-year period, cigarette consumption is likely to decline by 8 percent for every 10 percent increase in price?twice as much as Clinton assumed. As a result, the $1-a-pack tax will bring in much less revenue than President Clinton projected.
Source: Gary S. Becker, "Warning: A Higher Cigarette Tax May Be Hazardous to Health Financing," BusinessWeek, August 15, 1994, p. 18.
According to Professor Becker, by how much would cigarette prices have to rise to get a 15 percent reduction in smoking in
Instructions: Enter your response as a percentage and to one decimal place.
(a) One year?
percent
Instructions: Enter your response as a percentage and two decimal places.
(b) Three years?
percent