Friday, August 7, 2009

Economics 101 & Democrats

Price of market balance, rebuiltImage via Wikipedia

I think I figured out why the Democrats do not like the free market. They do not understand it, and they do not have an understanding of basic economics.

Earlier this year, the House and Senate, passed a bill to expand the State Children's Health Insurance Program. To fund the program, they significantly increased the federal excise tax on all tobacco products.

In a truly free market, the laws of supply and demand show that as the price of a product rises, the demand for that product will decrease. The problem with increasing the excise tax on tobacco products to fund a program like SCHIP is that demand for those products will decrease, leading to a shortfall in funding.

The National Center for Policy Analysis released a report this week on the effectiveness of the tobacco tax increase. In what was not a big surprise to me, the NCPA reported that the increased taxes have led to a smaller pool of smokers, leading to a decrease in expected revenue. In order to fund the program, Congress will now have to find other revenues (taxes) to do so. Duh!!

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