The perils and pitfalls of sin taxes

The French think tank Institut économique Molinari has recently published a clear and well-referenced report that looks at the false premises and negative consequences associated with sin taxes on alcohol, food, soda and tobacco.

All the main issues are dealth with, including the persistent myth that unhealthy habits are a cost to the taxpayer…

'Rather than focus on extra costs in a given year from people engaging in their vices, what should be taken into account are the lifetime health costs run up by these people throughout their lives and then comparing these costs with those of people who steer clear of these vices and lead healthy lives. The latter generally live longer, with higher life expectancy. This means they give rise to other health care costs — which are especially substantial at an advanced age — that offset or maybe even exceed all the extra costs generated by obese people or smokers over their lifetimes.'

The lifetime healthcare costs of smokers, the obese and slim nonsmokers is shown in this chart:








The negative unintended consequences of sin taxes, including substitution effects, black market activity and making the poor poorer are also addressed. With more calls for higher taxes in the name of public health being made this week, the empirical case against such policies cannot be made too often.

The authors conclude:

'Instituting these taxes must be approached with the greatest caution, with this type of taxation producing many adverse effects. It causes distortions and waste while driving consumers to substitute products of lesser quality that are at least as harmful to the health, with the sole aim of avoiding a tax. Taxes such as these are the primary reason for the existence of a black market and illicit trafficking, with their share of crimes, violence and corruption.'

You can read the English translation of 'The pitfalls of so-called “sin” taxation' here.