Do higher cigarette prices make smokers better off?

Economists have long searched for goods they can tax which impose no deadweight losses (DWLs) on society. Henry George supposed that assets like land which are in fixed supply can be taxed without social costs since customer demands will not change and supply will not change - the only effect of a tax on rents would be to shift rental income from land owners into the pockets of government. Such taxes produce large transfers but impose no DWLs. George in fact argued that all taxes should be based on taxing land. He wasn't quite right because he ignored quality improvements in land - these are less likely to be made with hefty land taxes - and anyway a tax base that was based on land would be too small to fund Labor Party wish lists. (George's idea was quite smart however and led later economists, such as that legendary genius Frank Plumpton Ramsay, to suggest focusing taxes on goods in inelastic supply and demand to avoid allocative losses).

My colleague at Monash University, and by far the best welfare economist in Australia, Professor Yew-Kwang Ng, has suggested taxing diamond-like goods whose value is seen to be higher in the eyes of consumers when they are more expensive. Again the basic idea is that noone loses with such an excise tax. The government gets revenue and diamond consumers get more satisfaction by being able to display even more expensive diamonds.

Now I have found a third twist to the possibility of taxes without DWLs that involves taxing naughty or sinful goods that consumers really know they should not consume. FXH sent me a link to this attractive piece in Slate that reviews a relatively old paper by Jonathon Gruber and Sendhil Mullainathan arguing that excises on tobacco products made consumers better-off in both the US and Canada by increasing their ability to resist the temptation to indulge in the filthy habit of cigarette smoking.

Its a fairly complex argument but basically this paper argues that higher taxes and hence higher prices give consumers greater motivation for self-control. Higher prices reingage the cognitive parts of the brain and make it easier for smokers to cut back or stop smoking

It is worth noting that this argument augments traditional Ramsay-George arguments for levying hefty taxes on cigarettes because their demands are relatively inelastic. From these perspective taxing cigarettes both punishes a sinful activity and delivers loads of dough to the Treasury.

Thanks FXH for the Slate reference.