Sin Taxes, Why Governments Tax Sin and Whether They Work
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Tax Policy
posted by : Admin DOQ : 2020-05-22 07:22:32
What is sin tax?
Sin tax is levied to discourage people from consuming goods or services such as tobacco and alcohol that are harmful to society. It serves two purposes:
i) Make the specific goods expensive, so much so that consumers are forced to not consume them
ii) Collect higher taxes from industries that produce such goods and use it to fund welfare expenditure.
Governments of various economies have resorted to levying sin tax to make consumers of harmful products liable for their actions. They have gone a step ahead and added other products in addition to alcohol and cigarettes to the list of sin goods. For instance, the Canadian, UK, and Swedish governments consider lotteries, fuel, and gambling as sin goods. Mexico has a soda tax and the UK is considering a sugar tax to fight obesity.
For instance, burning fuel emits carbon dioxide, which is harmful to all living beings alike (and the drivers do pay sin tax for it). However, the same is not the case with smoking and drinking.
In case of alcohol, sin tax doesn’t differentiate between an occasional drinker and a regular consumer. Though the latter is not exposed to a high health risk, they still have to pay sin tax just as the regular drinkers. The story is different in case of tobacco consumption. Since nicotine is extremely addictive, most consumers of cigarettes are regular users of it. Further, smokers die earlier as compared to non-smokers, which means they draw lesser from pensions during their retirement and save national expenditure.
Thus, in cases where products are detrimental to those who consume it and not to the population at large, the purpose of a sin tax is defeated. But, a noteworthy fact is that sin tax collected on liquor and tobacco contribute majorly to the revenue of various state governments in Kenya.
To conclude, levying sin tax as a way to change the behaviour of individual consumers is justified but habitual smokers and drinkers continue to exploit their health regardless. This can be a burden to poor families.
Pros
There are three arguments in favor of sin taxes.
i) They discourage unhealthy behavior,
ii) they pay for society's costs, and
ii) they’re popular with voters.
Sin taxes discourage people from unhealthy behavior. In 2009, the federal government raised cigarette taxes by $0.62 a pack. Teenage smoking rates fell by 10 percent, and overall cigarette sales dropped 8.3 percent. Between 2005 and 2015, the percentage of people who smoked fell from 21 percent to 15 percent.
For example, a 10 percent tax on cigarettes reduces demand by 4 percent. This reduction in demand is even more pronounced among young people. A 10 percent tax reduces smoking among those aged 12 to 17 by 11.9 percent.
Why do states want to reduce smoking? Lung cancer is the leading cause of cancer death.
Between 80 percent and 90 percent of lung cancer deaths are due to smoking, according to the National Cancer Institute. Kentucky, the state with the highest tobacco use, has one of the highest rates of lung cancer.
Sin taxes help states pay the cost of treating the public health consequences of smoking, drinking, and gambling. But states don’t spend as much of this tax revenue on health care as they could. It covers some of society's cost
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of educating people about lung cancer.
Sin taxes are more politically viable than raising income or sales taxes. According to the Campaign for Tobacco-Free Kids, national and state opinion polls have "consistently shown broad voter support" for tobacco tax increases.
In 2017, 57 percent of Americans supported sin taxes on soda if the money was used for children's health programs.
Cons
Sin taxes aren't high enough to work. If states really wanted to eliminate the behavior, they would raise the tax until it was high enough to discourage most people from picking up the habit, but not high enough to encourage a black market.
Sin taxes aren't high enough to offset the behavior's cost to society. If they were, they'd be a Pigouvian tax. An example of this type of tax is the carbon tax. Britain imposed a carbon tax, prohibitive enough to force utility companies to switch from fossil fuels to natural gas. As a result, greenhouse gas emissions in the United Kingdom drastically fell to late 19th century levels. If the carbon tax were just a sin tax, its cost wouldn’t be high enough to compel companies to look for cleaner alternative fuel sources.
History
In 1776, Adam Smith wrote that taxes on cigarettes, rum, and sugar are appropriate. These commodities are not essential for life but are widely consumed.
The Bottom Line
A sin tax discourages activities that create socially harmful consequences. It raises the cost of that activity, hoping that fewer people will partake in it.
These taxes don't really work but are popular because they feel morally justified. The revenue does help states pay some of the costs of the additional harm to the public good, however, some sin taxes are regressive because the poor pay a higher percentage of their income.
