Sin taxes work or raise revenue, they can’t do both
Jan 2012 04

Sin taxes work or raise revenue, they can’t do both8

The Economist writes about a long term challenge for the Chancellor of the Exchequer as people drink less and smoke less, reducing the revenue from duties on cigarettes and booze.  More efficient cars could have the same effect.  A Citigroup study has pointed out that the lower fueling costs of electric cars, which partly make up for the currently high initial costs, are the result of taxation on electricity being lower than taxes on petrol or diesel.  So if we all start driving them what will politicians do with a Fuel Duty shaped hole in their budgets?

This gets at the problem with attempts by advocates of sin taxes to have it both ways when they argue for those taxes.  On the one hand they’re all trying to save us from some vice, like driving to work or enjoying a drink.  On the other they promise a new, friendly way of financing public spending. To the extent that you succeed in changing behaviour that revenue will evaporate.  The fact that some of these taxes raise so much money shows that they are mostly about politicians’ just taking the cash to prop up wasteful spending – often particularly from people on low and middle incomes – rather than improving the nation’s health or helping the environment.

The best argument for these taxes is that they are needed to control externalities, costs our actions impose on others that we don’t pay for without the taxes.  That logic doesn’t necessarily work out either in theory or in practice.  Politics rarely produces the neutral, efficient interventions that the theory requires.

And that argument can’t justify our existing sin taxes.  I’ve looked at the problems with green taxes in research for the TPA and in detail for the book Let them eat carbon.  But tobacco duties are another example where the evidence to justify high taxes on smokers who will bear most of the costs of their addiction themselves is very weak.  I wrote for ConservativeHome about the weaknesses in a Policy Exchange report that was a good example of the problems with that evidence.

If these are just taxes to raise revenue then they start to look very unfair, and a very bad idea.  Taking money from people on low and middle incomes means leaving them either more dependent on benefits, reducing their ability to stand on their own two feet, or impoverished.  Not very virtuous at all.

Related Posts

  • Malcolm Bracken

    Not true. A tax can reduce consumption and raise revenue. It depends on the interplay between the fall in consumption and the increase in the tax. If tax goes up 5% and consumption falls 2%, there will be a raise in revenue. It’s related to the laffer curve, something you’re keen to point out in other contexts….

    • Graham Jones

      What if consumption falls 5% against the tax rise of 5%? That will be more a laughter curve!!!

  • Peter Roberts

    I hardly think driving to work is ‘a vice’

    • Malcolm Bracken

      It is in the context of congestion. We’ve a good (in this instance road space) which is mispriced. It’s too dear most of the day, and way too cheap 7:30am-9:30am and 4-6pm. fuel duty is the government’s chosen tool, but it’s a blunt one. I favour variable parking charges as a proxy for road pricing.

      • Peter Roberts

        The problem of course is people do not choose to sit in congestion, they have to as they need to be at work at a given time. If you can avoid a congested journey – just about everyone would.

        That is why variable charging through road pricing or parking charges or whatever means is unfair because it is an inevitable charge the vast majority cannot avoid.

        You also need to consider that outside London and most big cities, there really isn’t that much natural congestion. Most of the stationary traffic is the result of traffic lights and dreadful junction design.

  • Graham Jones

    A similar scenario with the water companies. We are all encouraged to use meters with the claim that they can save money in water charges. So if we all have water meters installed and do save money where will that leave the water companies? There will be a hole in their finances that will need plugging. I am sure the meter charges will then be re-adjusted and any savings we make will be short term.

  • don hammond

    Electric cars are a very bad idea anyway. If adopted the energy used to fuel the miles driven is greater after losses in generation, transmission, battery storage, etc than a half way respectable petrol engine. Add the additional demand for power and blackouts become yet more inevitable as we fail to build nuclear generation capacity.

  • Kobi

    City of Edinburgh Council held a referendum on road-pricing a few years ago.  Amongst all the research provided for the council, which came out at the preceding public inquiry, was public attitude surveys to the levels of the proposed congestion charge (as they were calling it).  Above £2 per charge, attitudes started to change dramatically, and there would have been a significant drop in the amount of people driving their cars into Edinburgh.  However, that would have been a problem for the council, as all their plans for shiny new transport infrastructure (trams, gold-plated buses, taxis for everyone etc etc) were predicated on the congestion charge raising oodles of cash over 25 years to pay for them (and consequently allowing all the money that the council spent on transport previously to be spent on green diversity co-ordinators, social workers all round, et al).  So what did the council do, but set the proposed charge at a level to maximise the revenue, but minimise the reduction in charge-paying traffic (estimated at the level set to be around a 10% reduction).  The good citizens of Edinburgh saw through this nonsense, and in the referendum went “Congestion charge? Aye right.  You mean another tax.”  and voted it down overwhelmingly.