The combined measures of increasing the tax on cigarettes by $1 per pack while simultaneously providing an income tax cut of $500 would likely have an effect on the person's consumption of cigarettes.

Suppose there is a bill to increase the tax on cigarettes by $1 per pack coupled with an income tax cut of $500. Suppose a person smokes an average of 500 packs of cigarettes per year, and would thus face a tax increase of about $500 per year from the cigarette tax at the person’s current level of consumption. The income tax measure would increase the person’s after-tax income by $500. Would the combined measures be likely to have any effect on the person’s consumption of cigarettes? Why or why not?

The combined measures of increasing the tax on cigarettes by $1 per pack while simultaneously providing an income tax cut of $500 would likely have an effect on the person's consumption of cigarettes. Here's why:

Cigarette Price Increase

Increasing the tax on cigarettes by $1 per pack would make cigarettes more expensive. When the price of cigarettes rises, it tends to discourage smoking, especially among price-sensitive consumers. People may reduce their cigarette consumption or even quit smoking altogether in response to higher prices.

Income Tax Cut

Providing an income tax cut of $500 would effectively put more money in the person's pocket. This extra income may offset the increased cost of cigarettes due to the tax hike, which could potentially lessen the financial impact of the cigarette tax increase.

However, the overall effect on the person's cigarette consumption depends on several factors:

Price Elasticity of Demand

The extent to which people reduce their cigarette consumption in response to price increases varies. If the person is highly sensitive to price changes (elastic demand), they may reduce their cigarette consumption significantly. If they are less sensitive (inelastic demand), they may continue to smoke a similar amount, despite the price increase.

Individual Behavior

Some smokers may be more motivated to quit or reduce smoking due to health concerns or personal preferences, regardless of price changes. Others may be more financially motivated and could be influenced by the tax increase.

Tax Impact

Whether the $500 income tax cut fully offsets the $500 increase in cigarette taxes for this individual depends on their overall income and tax situation. If the income tax cut is proportionally greater for them, they may find it easier to absorb the cigarette tax increase. Conversely, if the cigarette tax increase represents a significant portion of their disposable income, they may reduce consumption.

Psychological and Behavioral Factors

Smoking is not solely determined by economic factors. Psychological and behavioral factors, such as addiction and habit, can strongly influence a person's decision to continue or reduce smoking.

So, to summarize, while the income tax cut could help offset the financial impact of the cigarette tax increase, the overall effect on the person's cigarette consumption will depend on a complex interplay of economic, psychological, and behavioral factors. It's likely that some reduction in cigarette consumption would occur, especially if the person is price-sensitive, but the extent of that reduction is difficult to predict without knowing more about the individual's specific circumstances and preferences.

Reference

Bader, P., Boisclair, D., & Ferrence, R. (2011, November). Effects of Tobacco Taxation and pricing on smoking behavior in high risk populations: A knowledge synthesis. International journal of environmental research and public health. https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3228562/ 

Cruces, G., Falcone, G., & Puig, J. (2022, September 1). Differential price responses for tobacco consumption: Implications for tax incidence. Tobacco Control. https://tobaccocontrol.bmj.com/content/31/Suppl_2/s95 

Rapid evidence review: Strengths and limitations of tobacco taxation ... (n.d.-a). https://www.healthscotland.scot/media/1829/rapid-evidence-review-strengths-and-limitations-of-tobacco-taxation-and-pricing-strategies.pdf 

Social, environmental, cognitive, and genetic influences on the use of ... (n.d.-b). https://www.ncbi.nlm.nih.gov/books/NBK99236/