Taxing the Poor

The income tax is highly progressive. It takes a higher portion of the income of the rich than the poor. But federal, state and local governments raise revenues in a number of ways that are regressive, taking
a greater portion of the incomes of the poor than the rich. In some cases, the total dollar amounts paid by the poor are higher than the amounts paid by the rich.

One popular way of raising state revenue is through a state-run lottery (coupled with a prohibition on competing private lotteries). This way of raising funds is highly regressive. The dollar amount spent on the lottery by the lowest-income individuals (earning less than $10,000 annually) is twice as much as the highest earners (earning more than $100,000 annually). But lotteries have worse odds than other forms of gambling; in fact, states retain some 33 cents of each dollar of lottery revenue — whereas privately owned casinos keep just 4.4 percent of the take.

In addition to direct taxation, state governments have imposed indirect costs on tobacco users through litigation. The Master Settlement Agreement between the major tobacco companies and 46 states requires the tobacco companies to pay the states $200 billion over 25 years to compensate for state health care costs attributed to smoking. More than 90 percent of the settlement costs are passed on to consumers. In fact, the settlement raised the price of cigarettes about 45 cents per pack.

Some advocates claim taxes on harmful behaviors — like smoking and excessive drinking — are justified to recoup the costs those activities impose on others, such as secondhand smoke and drunk driving.
Although the evidence is mixed, it appears that taxes on tobacco already more than compensate for the social costs of smoking. Even though alcohol consumers as a group do not pay for all the costs imposed
on society by alcoholism, there is no reason to punish moderate drinkers for the behavior of alcoholics.

Advocates also claim these taxes encourage people to change their behaviors in socially desirable ways, because the taxes are almost entirely passed on to consumers. However, when prices for tobacco and alcohol products rise due to tax increases, demand for these products does not go down much. A few consumers will quit and many will substitute lower-cost brands, but most lower-income smokers and drinkers will continue to use tobacco and alcohol. Thus, raising taxes on these products makes the tax burden even more regressive.