We all like to think that there are relatively easy solutions to complex issues. Today, income inequality is at the forefront of much discourse in this country. Specifically, we are hearing many suggestions about how we can reduce the overconcentration of wealth controlled by the top 1% of citizens. French economist Thomas Piketty has written a best-seller entitled Capital in the Twenty-First Century that addresses the issue of growing wealth disparity by instituting much higher tax rates, up to 80% in some cases, for high earners.
We will not pass judgment on his proposal; however, we can use a local issue — the taxation of cigarettes in New York State — to prove a point. According to a recent study published by the Tax Foundation, a non-partisan think tank, New York has enacted the highest per-pack cigarette taxes in the nation, at $4.35 as of 2012. The intent of the tax increase was undoubtedly to discourage smoking, particularly among the young. As with most things in life, unforeseen consequences can wreak havoc with our best-laid plans.
The unintended consequence of New York’s punitive cigarette tax rate is that it has vaulted the state into the number one position in the nation for net inflow of smuggled cigarettes. Based on 2012 figures, 57% of all cigarettes consumed in the state have been smuggled in from lower tax environs.
Instead of curbing smoking, this disproportionate tax rate has encouraged criminal enterprises — which, by the way, pay no income or sales taxes. Things are even worse in New York City where an additional $1.50 per pack tax is assessed.
This example illustrates the difficulty of attempting to engineer social policy via the tax code. On the surface it sounds logical; however, we live in a dynamic world where people have choices, even if we delude ourselves into thinking they do not. Before legislators promote their tax proposals, they should be required to publish a list of likely unintended consequences.
Ogorek Wealth Management, LLC (“Advisor”) is a registered investment advisor. Information contained in this blog is for informational purposes only and should not be considered investment advice.
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