Played with adroit drollness by former Nixon speechwriter Ben Stein, the teacher attempts to explain the Laffer Curve.
One student wakes suddenly on his desk in a pool of drool; another blows a massive bubble with her chewing gum.
The Laffer Curve is meant to demonstrate the optimum tax point; the level at which a certain rate can be maintained before it starts to discourage economic activity.
As the tax rate approaches 100%, activity grinds to a halt — as there is no incentive to work and there is nothing left to tax. The Laffer Curve is disputed when applied to income taxes.
However, it is a concept that can help when grappling with certain problems; like what to do about cigarettes.
When should the state stop increasing excise on cigarettes — given that people at some stage will instead start to buy them on the black market?
The budget has meant that someone who smokes 20 cigarettes each day will have to shell out an extra €182.50 per year.
However, there is increasing evidence that the taxation of this product has already crossed the optimum threshold.
In a Revenue study last year it was discovered that a 10c increase to a 20-pack of cigarettes, on average, results in reduced cigarette tax receipts of €6m.
The overall tax collected on cigarettes in Ireland declines the more they are taxed.
A pack of 20 has increased by €1 since then. If the study’s modelling is correct, cigarette excise will drop accordingly by €86m. So, it would appear that when the Government goes after smokers it has no short-term vested interest in doing so.
The optimistic interpretation is that a public good is being fulfilled. The sale of taxed cigarettes is falling dramatically in Ireland.
The pessimistic interpretation is that instead of quitting, many smokers, when faced with additional cost, are purchasing their cigarettes on the black market. However, the Revenue study says something else is going on.
It found that it wasn’t necessarily high excise rates that were reducing the number of smokers — but the availability of non-tobacco alternatives to smoking. E-cigarettes are now hugely popular.
Whereas in the past, those same people would have responded to a tax increase by turning to the illicit cigarette trade, they now have this new option.
On the face of it, this discovery is bad news for those who simply cannot shake the evil weed despite the arrival of E-cigarettes.
Traditionally, Government would have worried that a big increase in excise duty would drive smokers into the arms of smugglers.
Now the door may be open to further hikes. Cigarette prices can again increase as fewer people than before are likely to seek out illegal smokes. But before the smokers start choking on the idea of another 50c increase next year, here’s a thought.
One popular brand which costs €11.30 in Dublin, thanks to the Brexit effect, is now effectively priced at €10.80 in Newry. An annual saving of €186 for the 20-a-day smoker.
Given how the pound is faring, this could be a constraining factor when the old reliables are being considered next year.
- Paul Colgan is economics editor with Ireland Live News on UTV Ireland