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Taxes and Revenues

When taxes are too much for you…too bad.

But there is actually a point at which even the government thinks enough is enough. The tipping point happens when people start to react in a way that"s no good for Uncle Sam.

It happened back in the 1700s when Merry Old England taxed the colonies too much. That led to a tea party in Boston and the creation of the United States. England made a bunch of revenues with their taxes, sure, but lost its colonies in the process.

Oops.

Much more recently, the Marlboro Company wanted to make sure cigarettes could be sold in Illinois. Since the state was headed toward bankruptcy, the cigarette executives decided to link school funding with revenues from cigarettes. As long as cigarettes were sold in Illinois, the state was making money from taxes and the kids had someplace to go to school. [Insert evil laughs from Big Tobacco here.]

The schools needed lots of money, so they kept raising taxes on cigarettes to create even more revenues. A pack of cigarettes started at $2, but it skyrocketed to $10 a pack. People started getting tired of the high prices and either quit smoking, bought illegal cigarettes, or crossed a border (if they lived near one) to buy cigarettes from another state.

After a certain point, demand declined because of the high taxes. When that happened, the revenues the government made by selling cigarettes stayed flat—and eventually began to drop. It's known as an "efficient frontier" and it means the maximum level of taxing had been reached. Beyond that limit, there were no more revenues to be made from taxes, and it was back to the drawing board to try to figure out how to keep schools open.

And Big Tobacco had to find new ways to sell its products.

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