It’s conventional wisdom that taxes can change behavior by increasing the price of an activity. Cigarette taxes, for example, have reduced the number of smokers and the intensity of their activity. These are good impacts.

It’s also conventional wisdom that these taxes are regressive (poor people tend to smoke more AND cigarette taxes do not rise with income). Even worse, governments find it easier to increase these “sin taxes” as a means of gaining revenue. These are bad impacts.

I think that we can keep the good and lose the bad with one change:

Rebating taxes to smokers at the end of the year.

Here’s how it would work:

1. Say that the tax/pack of cigarettes is set at $3/pack.
2. A pack/day smoker would pay $1,095/year in taxes.
3. This person could get ALL that money back by providing 365 tax stamps in an annual return.
4. Although the smoker may act “as if” the tax did not exist when making purchases (foreseeing or rationalizing a rebate), such thought would require constant and conscious discipline. Once the rebate arrived, OTOH, that smoker would be unlikely to spend all of it on cigarettes.

The key to this idea is the difference between marginal prices and lump sum rebates: When making the buying decision, the smoker would face higher prices “on the margin,” and higher prices ($5? $7? $10/pack) would tend to dampen demand. The lump sum rebate, OTOH, would be treated as an income windfall and spent on whatever expense needed attention. Here are a few more notes:

• Administration costs would be high, since smokers would have to turn in many stamps to get their refunds. (There’s no point of making it easier to get refunds, since that makes it more likely that smokers will ignore the tax.)
• The poorer the person, the more likely they are to track stamps and claim their rebate (that’s progressive!). It may even become common to give your last cigarette (and the pack) to homeless people, as an income transfer.
• There will be attempts to counterfeit stamps, but what else is new?
• Taxes would have to rise if smoking levels stayed “too high.”
• Governments would have to replace rebated tax revenues somehow; they could probably fund the program (administration fees) with money from unclaimed stamps.
• This system could work for any tax on “bad behavior” — including emitting GHGs.

Whaddya think? Bottom Line: We may not be able to tell people to “do the right thing,” but we can make the “wrong thing” more expensive while minimizing financial burdens.