Monday 14 January 2013

No, you can't tax your way to happiness

Imagine that you have a meta-preference against smoking, but your day-to-day preference is always to delay quitting. If only you had some way of stopping yourself, you'd be better off. In the absence of other commitment mechanisms, regulatory or tax measures can make this particular type of smoker better off: the smoker who seriously and honestly wants to quit and who hasn't been able to figure out how to use any of the available pre-commitment mechanisms or other stop-smoking aids.

As consequence of behavioural models of this sort, some folks have pushed for tobacco restrictions based on the idea that they make the smoker himself better off - they allow him to do what he's always wanted to do anyway but couldn't do on his own. 

But there are big problems.

First, even if the model holds for that class of smoker, there are other classes of smokers who will be made worse off. Some smokers don't even claim they want to quit: they love smoking and wouldn't quit if there were a free and effective way of doing it. Even if the model works, the policy only works if the gains to the winners outweigh losses to the losers. And, it's never quite been clear to me how we know that the alleged meta-preference is the thing that should be respected rather than the demonstrated preference. It's possible that some smokers who claim to want to quit are lying - they know that smoking draws social disapproval, and claiming that they really do want to quit alleviates some of the stigma. And even if there were a real me-tomorrow who wanted to beat up me-today, why does the government get to step in and take that guy's side? It seems just as reasonable to say that me-tomorrow discounts too heavily the fun I'm having today.

Second, there are other precommitment devices available that could let those smokers who really do want to quit do so. Go to Stickk, make a commitment, and start using e-cigarettes instead. The ones who really want to quit get to do it; the ones who don't, don't have to. Or, pick up a copy of Jon Elster's Ulysses Unbound and consider alternative precommitment mechanisms. 

James Zucollo at TVHE points to a new study by Odermatt and Stutzer showing that hikes in cigarette taxes make likely smokers worse off in life satisfaction surveys. They even hurt those smokers who want to quit. 

From the paper:
Higher cigarette prices are related to overall lower reported levels of satisfaction with life, ceteris paribus. The partial correlation is, however, measured with a large standard error. Still, the effect is economically meaningful (and corroborated by our differential analysis for people with different smoking propensities). For a fifty percent price increase, we estimate a reduction in average life satisfaction of 0.02 points (on a four point scale). This is about one tenth of the effect of being unemployed rather than employed or equivalent to the effect of a 2.4 percentage points higher rate of unemployment on the population at large. This finding does not lend support to the effectiveness of cigarette taxes as an internalization strategy.
And public smoking bans only improve outcomes for smokers who recently tried to quit smoking and failed; some specifications show harms to other smokers, others don't. Finding benefits for wants-to-quit smokers is consistent with some behavioural models where a wants-to-quit smoker is made worse off by seeing people smoking. But, again, we have to wonder why those smokers didn't choose non-smoking establishments prior to the ban.