For a moment, ignore the question of whether, as a matter of principle, marijuana should be legal or illegal. What would be the net improvement of U.S. public finances if the drug were legalized and taxed?
To determine how much additional revenue would be created by legalization, the first step is to judge how large the U.S. market for marijuana is. These estimates vary widely, but both demand- and supply-side analyses of the U.S. marijuana market put it in the area of roughly $40 billion in transactions per year.
The second step is to estimate how this market would change in response to legalization and taxation. This is a little bit trickier. One could expect that if marijuana were legalized, there would be two effects on supply and demand: first, production costs would fall significantly, increasing supply; and second, by removing the threat of incarceration, consumption of the product would be more attractive, increasing demand. If the experience of the Netherlands is indicative, prices for marijuana would be reduced by half were legalization to occur. From a demand-side perspective, one might expect the quantity consumed to increase as if the price had fallen by another 20 percent.
If these assumptions are correct, and the government ended prohibition and then levied an excise tax on marijuana equal to 60 percent of the end retail value (an exclusive tax rate of 150 percent), then consumption of marijuana would remain unchanged relative to the status quo. Suppliers would sell the drug at half of the pre-legalization price and receive $20 billion, the government would apply taxes and collect $30 billion, and the end price to the consumer would rise, but any loss of demand would be offset by the demand increase from decriminalization. This is a high tax rate, but not so high as to invite a resumption of black market activity — in Europe, many countries tax cigarettes at an exclusive rate of 300 percent, and little black market activity exists.
New revenues are not the only budgetary effect of ending prohibition. In addition, legalization would end significant outlays on law enforcement and incarceration. Jeffrey Miron PhD ’84, an economist at Harvard, has studied the budgetary effects of marijuana prohibition and estimated the federal and state savings from the legalization of marijuana to be $13.7 billion annually. This is consistent with California’s experience with decriminalization — a reform which has reduced its marijuana law enforcement costs by 75 percent.
Assuming a further three percent annual growth rate in tax revenues and enforcement cost-avoidance, the total savings over a 10-year window from legalizing marijuana come to an even $500 billion.
It is tempting to ignore the principle of marijuana legality altogether. After all, the above scenario does not increase total consumption of marijuana from its present state, it merely extracts rents from those involved in the market and returns them to the taxpayer at large. In a sense, it is moot if one sees a legitimate public interest in reducing marijuana use — with high but achievable tax rates, the government could discourage marijuana to the same extent that prohibition does and save itself half a trillion dollars to boot.
And yet, to not bring up the principles behind legalization would be to give the anti-prohibition movement short shrift. It goes against the American character to deny a fellow man his right to the pursuit of happiness. When we do make such laws, we typically do so under one of two circumstances. The first is when one man’s pursuit of happiness conflicts with another’s right to life, liberty, or that same pursuit. No matter how much happiness you might obtain from it, the law cannot accommodate your hobby of stabbing people or burning down others’ houses without trampling the rights of others.
The second is when society does not believe a person has the necessary mental faculties to make an informed, rational choice for themselves. For example, we deny a multitude of rights to minors, many on the grounds that minors have not reached the level of maturity necessary to act in their own self-interest. Due to the addictive nature of cocaine, as well as the considerable risk of harm that it creates, it would be fair to conclude that there is no age at which a human being has matured to use the drug with rational self-interest, and hence a justification exists for its continuing prohibition.
Neither circumstance applies to marijuana. Marijuana consumption does not interfere with the rights of others, nor is it so harmful or addictive a drug that one could rule out individuals using it out of enlightened self-interest. Like hot dog eating or white water rafting, marijuana consumption should be counted among those activities in which society trusts the individual to make a trade-off between the joys of the activity and its physical risks.
In principal and in practice, the prohibition of marijuana is self-destructive. This country would be uniformly better off if marijuana was legalized and taxed.
Action: Legalize marijuana and tax it at an exclusive rate of 150 percent. 10-year savings: $500 billion.