Sin taxes work or raise revenue, they can't do both

January 04, 2012 9:13 AM

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.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.

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