Nt1310 Unit 3

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Discussion Assignment Unit 3 Suppose there is a bill to increase the tax on cigarettes by $1 per pack coupled with an income tax cut of $500. Suppose a person smokes an average of 500 packs of cigarettes per year—and would thus face a tax increase of about $500 per year from the cigarette tax at the person’s current level of consumption. The income tax measure would increase the person’s after-tax income by $500. Would the combined measures be likely to have any effect on the person’s consumption of cigarettes? Why or why not? Firstly, the $1 per pack increase in cigarette taxes would directly affect the price of cigarettes, leading to a higher cost per pack. This price increase would likely reduce the quantity demanded of cigarettes, particularly …show more content…
Secondly, the $500 income tax cut would increase the person's after-tax income, providing them with additional disposable income. This increase in disposable income could offset some or all of the impact of the cigarette tax increase on consumption. Individuals who prioritise spending on cigarettes may use the extra income to maintain their current level of cigarette consumption, despite the higher prices. However, others may choose to allocate the additional funds to other goods and services, resulting in a decrease in cigarette consumption (Rittenberg & Tregarthen, 2016). The combined effect of these measures on a person's cigarette consumption would depend on the relative magnitude of the tax increase and income tax cut, as well as individual preferences and behaviour. If the income tax cut significantly outweighs the cigarette tax increase in monetary value, the overall impact on consumption may be minimal or even positive. Conversely, if the tax increase substantially exceeds the income tax cut, the person may reduce their cigarette consumption in response to the higher prices (Rittenberg & Tregarthen,