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No, A Wealth Tax Is Not Like A Cigarette Tax

No, A Wealth Tax Is Not Like A Cigarette Tax

Ryan Bourne

Economics, Americas


Nothing alike.

Key point: Saying a wealth tax is like a cigarette tax is bad economics and a bad comparison.

Neil Irwin of the New York Times says Elizabeth Warren’s wealth tax should be thought of as akin to a cigarette tax, rather than an ordinary revenue raiser.

The point of it, he says, is not just to raise some funds for new government programs, but to deter vast wealth accumulation in the first place. This, he concludes, makes it a Pigouvian tax. As with these types of taxes on cigarettes, its aim is in part to reduce the activity it is taxing (the ranks of the super wealthy).

This is not very convincing and very confused on the economic theory.

The idea behind Pigouvian taxes is not that certain products or activities are inherently “bad,” but that their consumption generates broader social costs than those faced by the individual consumer. In a free-market, I might buy and smoke cigarettes, faced just with the private costs to me of purchasing them and any health consequences. But when I smoke, others around me might suffer the health costs associated with second-hand inhalation. This negative externality is said to be a “market failure” – meaning total consumption is beyond some “social optimum.” A tax can, theoretically, be imposed which incorporates these broader social costs into the price of the product. If imposed, total consumption will fall to the “correct” level with regards to economic efficiency.

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