South-Western College Publishing - Economics  
Government Considers A 'Botax' for Botox
Subject Luxury Tax On Cosmetic Procedures
Topic Supply and demand; Government and the Economy; Elasticity
Key Words

State Government; Tax; Cosmetic Surgery

News Story

Some state governments are considering imposing a tax on a number of cosmetic surgery procedures, from face-lifts to liposuction to Botox injections. This has drawn protests from plastic surgeons who argue that they will be adversely affected by such a tax.

New Jersey passed the first such law in the summer of 2004, and Texas, Illinois, Washington, Arkansas, Tennessee, and New York have followed with their own bills for consideration. The primary motivation for this is revenue generation to fund other initiatives, such as child health care. New Jersey imposed a 6% tax on a wide variety of procedures, but exempts those done when medically necessary (to correct a disfigurement, for example).

Statistics indicate that there is much money to be generated from these procedures. In 2004, 9.2 million procedures were done, a 5% increase over the previous year, and a 24% increase from 2000. A total of $8.4 billion was spent on such procedures. New Jersey predicted revenues of $24 million last year from the bill, but only saw $7 million. It's not clear whether consumers are going to nearby states to have the procedures done, however, or simply choosing not to have it done at all.

Critics argue that this bill unfairly targets women, as well as those with modest incomes, as 87% of all procedures last year were performed on females, and 60% of patients reported an income between $30,000 and $90,000.

Questions
1.

Indicate with a graph of supply and demand the impact of a new tax like this on the price of a Botox injection.

2. In protesting such a tax, what are plastic surgeons assuming about the relative elasticity of demand for cosmetic surgery procedures? Is there any indication to suggest that they are correct?
3. If the $7 million raised by New Jersey from this tax was used to offset health care expenses for children, what would happen to the cost of health insurance for children as a result? Indicate this with a graph of supply and demand for children's health insurance.
Source Rachel Emma Silverman. "The Nose-Job Tax," The Wall Street Journal 1 June 2005. D1+.

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