Price Isn’t Everything: Behavioral Response around Changes in Sin Taxes

59 Pages Posted: 30 Jun 2018 Last revised: 21 Oct 2018

See all articles by Alex Rees-Jones

Alex Rees-Jones

University of Pennsylvania - Operations & Information Management Department

Kyle Rozema

University of Chicago - Law School

Date Written: October 8, 2018

Abstract

Taxes change behavior. But how does this change arise? In traditional economic models, change is achieved through the price channel: assuming all else is held constant, taxes increase prices and thus decrease demand. However, the assumption that all else is held constant may be violated in the course of a legal change, in part because the process by which laws are changed often involves the provision of information, attempts at persuasion, and the deployment of alternative dissuasive tools. We examine violations of this assumption in a particular policy domain: discouraging smoking with cigarette taxes. We document a marked increase in related media coverage, lobbying efforts, place-based smoking restrictions, and anti-smoking appropriations in the time period surrounding a tax law change. The intensity of these factors is directly associated with decreases in cigarette consumption in a manner that could be confused with price effects. Our results suggest that price effects may have a surprisingly small role in the behavioral response that occurs around tax law changes.

Keywords: tax law, sin taxes, price effects, information effects, behavioral public finance

JEL Classification: D03, H24

Suggested Citation

Rees-Jones, Alex and Rozema, Kyle, Price Isn’t Everything: Behavioral Response around Changes in Sin Taxes (October 8, 2018). Available at SSRN: https://ssrn.com/abstract=3205688

Alex Rees-Jones

University of Pennsylvania - Operations & Information Management Department ( email )

Philadelphia, PA 19104
United States

HOME PAGE: http://https://opimweb.wharton.upenn.edu/profile/26948/

Kyle Rozema (Contact Author)

University of Chicago - Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States

HOME PAGE: http://www.kylerozema.com

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