Is smoking a fiscal good?

• We study the fiscal effect of eliminating smoking behavior.
• Smokers face higher mortality risk and health-care expenditures.
• Government pays for health-care by taxing capital and labor income.
• Removal of smokers leads to a reduction in the budget-balancing health-care tax rate.
• The welfare of nonsmokers depends on how Social Security responds to the experiment.

Even though smokers incur higher health expenditures than nonsmokers of the same age, smokers have significantly higher mortality rates, so the expected lifetime health expenditure for a smoker is actually lower than for a nonsmoker. Because of this fact, some politicians and policy-makers have argued that society might actually be better off promoting smoking rather than discouraging it. We consider this argument in a general-equilibrium model where health expenditures are paid for by a single-payer health-care system financed by taxes. Because the percentage increase in the tax base is larger than the percentage increase in health-care expenditures, the elimination of smoking actually decreases the budget-balancing health-care tax rate.