Images (40)
Document
| id |
id
26413653
|
|---|---|
| contentType |
contentType
document
|
| source |
source
import
|
Source image fields (6)
Extracted text
OCR Page 1 of 4006/11/98 THU 10:17 FAX 202 6222633
002
Memo To:
Bruce Reed
Elana Kagan
Cynthia Rice
Josh Gotbaum
From:
Jon Gruber
Re:
Scoring of Youth Lookback Revenues
At long last, here is our scoring of youth lookback revenues. A couple of notes:
A non-deductible penalty that is passed through to price actually has a positive net
"offset" - that is, the tax policy guys actually gave us money on the industry penalties.
This is because the offset is taken at a 25% rate, but we collect taxes from tobacco
companies at a 35% rate. Thus, the net effect of offset and non-deductibility of the
industry penalties is to add to the government's revenues.
We assume that company-specific penalties reduce youth smoking by the same amount as
an equivalent industry-specific penalty - e.g. we model them as being passed through to
price. But, in scoring the revenues, we don't actually assume that they are passed through
to price; rather, they are borne by shareholders of tobacco companies. This means that
there is not another positive increment of the type described above for the company-
specific penalties.
The assumption that the company-specific penalties reduce youth smoking is pretty
important for our revenue estimates; they would be another 15% larger if company-
specific penalties didn't have this effect. But the lack of a positive offset for company-
specific penalties has only a very small effect (about $3 billion over 25).
I understand that JCT has scored the lookback penalties as raising about $16 billion over
10. This is understandable since they assume a much smaller reduction in youth smoking
- as described in their recent booklet on scoring McCain, they assume that youth smoking
falls by less than 30%, whereas we assume a fall of about 50% once the industry-specific
lookback penalties are factored in, and over 50% when you add company-specific as well.
FYI, in going through my files I found this report that Wall Street analyst Gary Black did in
September. His main point is that the firms can meet their lookback targets by raising prices;
e.g. youth smoking is price sensitive. This is relevant since he has lately been a main advocate of
the opposite view, and has been cited by the industry. He doesn't focus on a particular elasticity,
although this can be read as endorsing an elasticity of -0.4; this is lower than where we are, but
much higher than what he is saying today. This may be useful ammunition at some point down
the road.
Relations
belongs_to