Friday, March 16, 2007

China Tax Update/ Iowa Cigarettes

A news alert from the BNA Daily Tax Report indicates that China’s National People’s Congress has passed legislation to equalize corporate tax rates for foreign and domestic corporations. The proposed legislation was discussed in my previous post (March 6).

Of course, equalization of rates can occur through either raising or lowering taxes. China chose to raise them. Perhaps they should have studied the example of Iceland (discussed below) more carefully.

On the matter of raising taxes, my own government in the people’s republic of Iowa (oops-perhaps I have China on my mind) recently raised cigarette taxes by $1/pack. The Laffer Curve was probably not on the mind of the legislators in this case, as the measure was targeted at reducing demand for smoking, particularly by young people, through raising the price of cigarettes. It will be interesting to see if this does effect consumption of cigarettes, though keep in mind that in this case consumption and sales will not be the same.

Interior Iowa residents may well feel the pinch from this tax, but those in border areas (like Council Bluffs or Davenport) will have options. Iowa’s tax increase means that they are now taxing at a higher rate than all their neighbors. (See the following chart, which shows rates at 1/1/2007, before the Iowa tax increase goes into effect:
In this context, tax competition will potentially derail the targeted effect by moving purchases outside, which may not affect consumption. Perhaps a more coordinated effort would be more successful.

It should be noted, however, that government efforts to reduce smoking have had a shaky track record. This month’s cover story in the ABA Journal, tellingly entitled “Up In Smoke: How Greet, Hubris, and High-Stakes Lobbying Laid Waste to the $246 billion Tobacco Settlement”, indicates that young adults still “overwhelmingly make up the 3000 people who start smoking daily.” Addictions are powerful things.

Happy Friday.

No comments: