Should vaping be taxed out of existence? Or do we have something here that will happily carry high taxes and we can gain revenue from it? We've seen that the Finance Minister is taxing parts of the vaping ecosystem much more than before and this could be in pursuit of either policy. A 100% import duty on parts of an electronic cigarette could be either of those after all.
There are two economic considerations here, one standard and classic, and one that I've just made up. Yes, my ego is large enough to think that the new one might provide the most illumination here.
The standard and classic is that we must distinguish between things that are complements and those that are substitutes. Complementary means that if more of this is done or consumed then more of another thing will also be done or consumed. If the consumption of martinis goes up then so will that of stuffed olives. Or, to be less James Bond about it, if people have more babies then the use of nappies will rise -- babies and nappies are complements. Substitutes would be people drinking bourbon instead of martinis.
With things that are undoubtedly bad, like smoking tobacco, it's really very important to work out what things like vaping are. Are they things which increase smoking? Do teens start to vape and then move on to the hard stuff? Or are they substitutes? Do teens vape instead of trying or getting hooked on cigarettes?
If they're a complement then we should perhaps tax vaping out of existence. If a substitute, then possibly even subsidize them so as to reduce the smoking that is the actual problem.
Except this runs into the other aim of tax policy, to tax those things that people will do even if they are taxed. Formally, those things with low elasticity of demand. Not for any moral reason, it's just that if people will still buy it when heavily taxed then we can collect lots of tax from that thing. Which is why tobacco, petrol, and booze are highly taxed in many places -- because governments can.
Whether to tax electronic cigarette parts 100% or not, doesn't really change which of these two answers is correct. But whether we should go on further and really persecute vaping then, well, yes, it does.
At which point the new invention, the Snowdon Curve. We're all familiar with the idea of the Laffer Curve, there's a tax rate that maximizes revenue collection. Rates higher than that end up lowering tax collection -- so, it's logically possible, sometimes, to increase taxes by reducing the tax rate. Note the sometimes there.
There are other such curves making much the same point. The Tabarrok Curve describes the connection between the strength of patent law and the amount of innovation we get -- it's possible for the legal protection to be too high, thereby lowering the amount of innovation we do get.
Chris Snowdon is a colleague of mine in London's think tank world. His particular brief is looking at lifestyles -- booze, tobacco, and so on. And he has an interesting observation about Australia. The country has the highest tobacco taxes in the world. Plain packaging, it's never even allowed nicotine contained vaping. The result? The rate of teen smoking is rising strongly.
Which is what leads to the invention of the Snowdon Curve (which I'll tell him about when it becomes a commonly used phrase). It's possible for the restrictions on something to become non-optimal. For the tax levels, the legal bans, to become so oppressive that everyone just ignores them.
Australia, for example, has a truly vast illegal tobacco and smuggling industry. That black market then leads to more, not less, of the very behaviour that the restrictions and taxes were supposed to reduce.
There is still that standard economic idea that we must distinguish between things which are complements and substitutes. If we wish to curb something it's vital to make that difference. But so too is it essential that we don't impose penalties so harsh that they just push everyone off into being entire scofflaws and thereby increase that very thing we wish to reduce.
As Australia shows, it's possible to be so harsh on smoking and vaping that we increase the very thing we wish to reduce most strongly -- teen smoking. Let's not do that, eh?
Tim Worstall is a senior fellow at the Adam Smith Institute in London.
