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Financial Literacy

Financial Literacy

Home Financial Literacy Taxes Shmaxes Taxes Destroying Revenues

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Taxes Destroying Revenues

So when are taxes... too much? Like seriously so onerous that the taxman can't taxeth any more? 

Well, the evil geniuses at Marlboro and company (cigarette lawyers) wanted to be sure that cigarettes could still be sold in Illinois. The state was and is teetering on bankruptcy, so they devised a financially brilliant plan to tie in-state cigarette revenues to school funding.

Basically, as long as the state made money selling lots of cigs, the schools kept their doors open. Where's Faust when ya need him?

The problem was that the schools needed a lot of money. So (rough numbers here) a $2 pack of cigarettes had tax after tax after tax added to it—and soon cost $10 a pack. Well, at $10 a pack, people simply stopped buying cigarettes. Great way to control smoking, actually. The state tried to keep raising the price and demand dropped directly proportionately with the increased tax. So the total revenues to the state remained flat and then gradually began to drop.

The state had reached what is called the "efficient frontier" of cigarette tax—that is they had taxed maximally; any additional tax reduced demand—there were no more additional cigarette taxes to be had. Illinois had to look elsewhere to fund its financial woes.

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