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

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Listed:
  • Austan Goolsbee
  • Joel Slemrod

Abstract

This paper documents the rise of the Internet as a source of cigarette tax competition for states in the United States. 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, the paper documents a substantial increase in the sensitivity of taxable cigarette sales 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 recent cigarette tax increases substantially. Given the continuing growth of the Internet and of Internet cigarette merchants, the results imply serious problems for state revenue authorities.

Suggested Citation

  • Austan Goolsbee & Joel Slemrod, 2007. "Playing with Fire: Cigarettes, Taxes and Competition from the Internet," Discussion Papers 07-002, Stanford Institute for Economic Policy Research.
  • Handle: RePEc:sip:dpaper:07-002
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    More about this item

    Keywords

    cigarette tax; cigarette sales; cigarette smuggling;
    All these keywords.

    JEL classification:

    • H27 - Public Economics - - Taxation, Subsidies, and Revenue - - - Other Sources of Revenue

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