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Economic Review

Smoking: Taxing Health and Social Security
Brian S. Armour and M. Melinda Pitts

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Cigarette smoking is costly in terms of not only its effects on smokers' health but also the direct and indirect financial costs it imposes on smokers and their families. For instance, premature death caused by smoking may redistribute Social Security income in unexpected ways that affect behavior and reduce the economic well-being of smokers and their dependents.

This article examines the effects of smoking-attributable mortality on the net marginal Social Security tax rate (NMSSTR)—the difference between the statutory payroll tax rate and the present value of future benefits to which a covered worker is entitled.

The analysis shows that smokers, as a result of shorter life expectancies, incur a higher NMSSTR than nonsmokers. This higher tax rate could have implications for both labor supply behavior and the Social Security System's funding.

The authors note that smoking status should be considered in assessing Social Security legislative proposals designed to reduce system inequities or promote social adequacy—in particular, amendments designed to reduce poverty among young widows and widowers. Failure to take smoking status into account may unintentionally promote behavior that is detrimental to health.