There was a micro-story in the news this week about a new tax imposed on tanning salons. The 10% tax is supposed to generate $2.7 billion over ten years to help pay for the Obama health care legislation. Why tax tanning salons? Because tanning is related to skin cancer, so it ought to be discouraged by taxation. Everyone knows that whatever is taxed is discouraged, right? But when the revenues from the tax are calculated, the assumption is that there will be no effect, so revenues will be reaped as if no one is deterred. That’s the way tax revenues are usually calculated, which explains why there are usually shortfalls. These days, having computers and such, revenues ought to projected taking tax avoidance into account.

It turns out that the tanning business is a rather thin one, with the average shop netting only about $40K to its own, and the most patrons between 16 and 32. Congress, in its wisdom, exempted from the tax tanning included as part of gym memberships. That will encourage gyms to add tanning booths. there is the free alternative of sunlight, insofar as sunlight is available. Congress also exempted spray-tans, thought less hazardous. Tanning shops offer both spray and ultraviolet tanning so they will have to obtain new accounting software and incur the recurring costs of more reporting overhead. So perhaps the salons, already running on thin margins, will be put out of business in significant numbers.

The tax raises the cost of a tan from $20 to $22. Maybe the young people won’t even notice. Young people pay hundreds of dollars for sneakers and for rock concerts, seeming not to care about the price. So maybe the small tax will have no measurable effect on the demand for tanning. What should we figure?

Another part of the health care bill puts a 40% tax on so-called “Cadillac” health care insurance plans, those costing more than $8,000 per year. Union members are, of course, exempt from the tax in return for their support of the Democrats who rammed through the legislation. The notion is that only Wall Street fat cats have such expensive health insurance, and they won’t be deterred by a mere 40% tax.

Where I live and at my age, there are no health insurance plans available at anywhere near as low a costs as $8000. My insurance, the cheapest available, is around $12,000, implying a tax of $4800. Obamacare will increase health care costs, since 40 million more people will be covered, and that increases the demand for care without increasing the supply. The bottom line is that I will be better off dropping health insurance and paying the fine of less than $1000 for doing so.

But wait, don’t count out American creativity. Maybe ways can found within the law to reduce my coverage so that I can get some for under $8000, even if it isn’t as complete coverage as I have now. Maybe I can start my own union, with only myself and my wife as members, to get the union exemption. Perhaps I should immediately register makeyourownunion.com.

In estimating the from the revenues from the 40% tax, the Congressional Budget Office assumed that no tax avoidance would occur and that revenues from this source would grow substantially year after year. Since the response is so hard to figure, what else could they do?

In the 90s, Congress put a heavy tax on luxury goods, including yachts. rich people by yachts, so they won’t be put off by a tax, right? Wrong. Rich people know how to shop. The American yacht-building industry as some buyers bought overseas and other refused to buy at all. Revenues evaporated. Congress eventually repealed the tax.

The questions of tax revenues from taxes on tanning, health insurance, and yachts call upon the relation of supply and demand as a function of price. Increase the demand and fewer people will buy the product. At prices increased by taxes, some fewer people will buy the product. The relationship depends the available alternatives (spray tanning), the strategies that emerge for tax avoidance (your own union), the psychology and education of the buyer (buy overseas), and state of the economy (don’t spend at all).

The Congressional Budget Office should build a library of supply-and-demand curves based upon historical experience. The curves should reflex the nature of the item in terms of alternatives and the type of buyer. Taxes on food, water, and fuel are less likely to affect demand because there are few alternatives and limits on conservation. Taxes on expensive luxuries and financial instruments face intelligent buyers who will be relatively good at avoiding them. A yield of a proposed new tax can then be estimated using a generic curve of something roughly similar in the past.

Admittedly, there will be surprises. A tax may trigger an unexpected tripping point that causes a whole industry to pack up and leave. Other times the market may be persistent in the face of increased price. On the average, the estimates will be much better than assuming that price has no effect on demand.