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American Economic Journal: Economic Policy: Vol. 2 No. 1 (February 2010)

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Playing with Fire: Cigarettes, Taxes, and Competition from the Internet

Article Citation

Goolsbee, Austan, Michael F. Lovenheim, and Joel Slemrod. 2010. "Playing with Fire: Cigarettes, Taxes, and Competition from the Internet." American Economic Journal: Economic Policy, 2(1): 131-54.

DOI: 10.1257/pol.2.1.131

Abstract

This paper documents the rise of the Internet as a source of state tax-free cigarettes and its impact on taxed sales elasticities. Using data on cigarette tax rates, taxable cigarette sales and individual smoking rates by state from 1980 to 2005 merged with data on Internet penetration, this paper documents that there has been a substantial increase in the sensitivity of taxable cigarette sales to state tax rates that is correlated with the rise of Internet usage within states. The estimates imply that the increased sensitivity from cigarette smuggling over the Internet has lessened the revenue generating potential of cigarette tax increases significantly, although states are still far from the revenue-maximizing tax rates. (JEL D12, H25, H31, H71, L66)

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Authors

Goolsbee, Austan (U Chicago)
Lovenheim, Michael F. (Stanford Institute for Economic Policy Research, Stanford U)
Slemrod, Joel (U MI)

JEL Classifications

D12: Consumer Economics: Empirical Analysis
H25: Business Taxes and Subsidies including sales and value-added (VAT)
H31: Fiscal Policies and Behavior of Economic Agents: Household
H71: State and Local Taxation, Subsidies, and Revenue
L66: Food; Beverages; Cosmetics; Tobacco; Wine and Spirits

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