Sin taxes produce diabolical outcomes

The search for government revenue in fiscally tight times tempts legislators to raise revenue by imposing unusually high excise taxes on cigarettes, liquor, gambling and so on. This type of charge, often called a "sin tax," appeals to voters who view it as a way of discouraging consumption of certain objectionable products. Yet the temptation to impose sin taxes is one that should be resisted for economic reasons, says Robert Sirico, president and co-founder of the Acton Institute for the Study of Religion and Liberty.

Any sin tax is harmful in a number of ways, says Sirico. Among the costs:

It reduces the income of the buyer and lowers profits for the seller, and leads to reduced investment, wages and jobs.

It is not likely to seriously discourage detrimental habits, but higher prices encourage people to turn to harder substances to feed their habits at the same price.

It may eventually decrease government revenue, especially as people move their business to the informal sector.

It creates underground markets, which tend toward corruption and violence, and fosters disrespect for the law.

It sets up a moral hazard for policy makers, who vacillate between wanting to discourage undesirable behaviour and wanting to encourage it for revenue purposes.

Whatever economic or social benefits one can dream up from the sin tax, we must also realise that the decision to tax must be weighed against the social benefits for reducing the behaviour by slow and deliberate persuasion and voluntary action. When it comes to public policy, the preferred method of discouraging sin should fall under the category of alternative institutions, especially family, church and school, says Sirico.

Source: Robert A. Sirico, Sin Tax: Inferior Revenue Sources, Heartland Institute, July 2004.

For text http://www.heartland.org/Article.cfm?artId=15293

For more on the Behavioural Effects of Taxeshttp://www.ncpa.org/iss/tax/

FMF Policy Bulletin/19 October 2004