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Ah.Originally Posted by SiM
Okay, my answer to that is "yes and no".
Governments didn't just impose 60% tax on fags, booze and petrol, etc. If they had, it might have had the effect you describe, of changing behaviour. It might have been enough of a shock for people to either think "bother that", and give up smoking, or whatever. Or it might have made the products effectively unaffordable to a large number of people, in which case, it would certainly change the behaviour of those people. Or it might not. Would £7.80 for 20 cause people to buy lets fags, or give up altogether? Some, probably. But how many? On the other hand, if fags went from £5 for20 to £20 for 20, or £50 for 20, THAT would do it.
But guess what most smoker's reaction to £5.30 instead of £5.00 will be? Moans, grumbles, and no change in demand. Or little, anyway. So you give them six months or a year to get used to that, then up it to £5.55, then in another year, £5.80. And so on. It's carefully calibrated to raise revenue, not affect smoking.
Did you notice that when there were fuel protests and furore about petrol prices, the government stopped increasing it for awhile, and even delayed already announced rises? Is that because they wanted to affect behaviour? If it was, they'd have followed through, or loaded a bit more, because it was having the desired impact. But no, they backed off.
Really, really painful increases are not what governments have done. They've drip...dripped the price increase, in affordable if sometimes painful little bites. That's precisely why it won't change behaviour. It's the factors that make those goods price inelastic that determine behaviour. They're either essentials, or luxuries. If essentials, people can't give them up. If luxuries, they won't, unless you either make them unaffordable, or make affording them so painful that it crosses over the threshold of what people are prepared to pay for that luxury.
A good part of all this, and a major factor that impacts on elasticity, especially of luxuries, is general prosperity. In my childhood, my mother was given the weekly housekeeping from the pay packet, and it had to feed the family for the week. If she was profligate and indulged in luxuries at the start of the week, we'd be subsisting on beans on toast by the end of it .... or going hungry. The price we'd [pay for steak on Monday would be beans on toast for Thursday through to Sunday. That is ... opportunity cost, another concept I'm sure you're familiar with.
But, by and large, what's the opportunity cost of continuing to smoke, drink or drive in today's relatively prosperous (and credit-fuelled) society? If it's giving up a restaurant trip once a week (or month), or not buying a DVD or two, or not upgrading the 40" TV to a newer 50", or holidaying oin Florida instead of the Seychelles, or Spain instead of Florida, that's precisely what a lot of people will do.
So yes, a massive increase in tax in one go might well modify behaviour, either by making that item simply unaffordable, or by reordering consumer priorities via opportunity cost. But a gradual increasing, over time, from 0% to 60%, doesn't have the same effect. The psychological effect, for one thing, is absent, and it gives people time to adjust and for incomes to increase.
Which is why I disputed your use of cigs, booze and cars as examples of taxs intended to change behaviour. They aren't. They're intended to change goverment revenue ... upwards.
It has been argued that the recent increase in tax on"fuel-guzzling" 4x4's is aimed at changing behaviour. While that argument is more credible that booze, cigs and petrol, it's still weak. If you buy a (new) 4x4, it says two things (well, two relevant to this discussion). One is that that's the kind of vehicle you want (or need). Secondly, you can afford it. They are currently neither cheap to buy, nor cheap to insure. And again, I would argue that the level of increase is such that, while a goodly chunk of cash in it's own right, is relatively small in relation to the cost of the vehicle, both up-front and over it's ownership period. If you can't afford the extra tax, you probably wouldn't have been talking about a new vehicle of that type in the first place. You'd either be looking second-hand, or at much cheaper vehicles.
So again, I say that even that tax, which was explicitly sold by the Chancellor as an environmental behaviour-changing tax, is actually going to have minimal effect on behaviour, but will raise money. In other words, yet again, it's spin.
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