A sinful proposal

"Sin taxes are objectionable, finally, because the burdens imposed by them bear no rational connection with the benefits of government expenditures."

The impending 5 percent state sales tax on cigarettes illustrates a growing fascination by politicians of raising "sin taxes" to decrease government deficits. It is as if, by raising taxes on cigarettes and alcoholic beverages, the government can fight two sins at once - the deficit and consumption of the taxed product.

This idea shows up at the federal and state level. Congress has been threatening to raise federal excise taxes on beer, liquor and cigarettes. A bipartisan National Economic Commission, which will present a deficit-reduction plan to the next administration, is likely to recommend and increase in federal excise taxes.

In their fascination with this method of deficit reduction, politicians are committing sins - economic sins - of their own. Economists disagree on how to reduce the deficit, on how to measure it and even on whether it matters. But there is little disagreement about singling out individual products for taxation. This idea is one of the worst ways of raising revenue. It fails three tests for determining whether a tax is good:

  • The equity test: Does the burden of the tax vary directly with the taxpayer's ability to pay?
  • The efficiency test: Does the tax do relatively little harm to the capacity of the market price system to provide for an efficient allocation of resources?
  • The benefits-received test: Does the burden imposed by the tax correspond roughly to the benefits that the taxpayer derives from government expenditures?

Sin taxes do poorly on the equity test because the higher consumer prices in which they result impose a relatively heavy burden on middle- and low-income people.

Sin taxes do poorly on efficiency tests. Any method of financing government expenditures causes harm to the market price system. The income tax causes harm by distorting the way in which people make choices between work and leisure and savings and consumption. The income tax raises the cost to employers of obtaining the services of labor and capital, and it lowers the reward that people receive for providing those services. It leads to a decline in the volume of labor and capital services that flow into production and to a decline in production.

While the income tax discourages the production of goods, it does not discourage the production of some goods more than others. Sin taxes distort the prices of the goods on which they are imposed relative to others. A tax on Product A makes it appear relatively more expensive than some untaxed Product B. It causes harm not merely by discouraging the production of A but also by encouraging consumers to substitute B for A. In confuses the price signals on which consumers rely to exert their sovereign will on the marketplace.

Some proponents of sin taxes support them because they discourage the consumption of the products on which they are imposed. Unfortunately, however, this effect is at odds with consumer sovereignty and with using the tax to raise revenue. The more the tax discourages consumption, the less revenue it yields.

Sin taxes are objectionable, finally, because the burdens imposed by them bear no rational connection with the benefits of government expenditures.

A good tax system is one in which taxpayers pay for government services roughly in proportion to the benefits that they receive from those services.

Sin taxes concentrate the costs of providing government services arbitrarily on certain groups - cigarette smokers, beer drinkers - whose composition bears little relationship to the benefits that their members receive from those services. Smokers already pay 42 cents in federal and state excises taxes for a pack of cigarettes, about 28 percent of the sale price. This gives nonsmokers a free ride. It encourages the idea that government can spend all it wants provided there is a handy group of "sinners" around to bear the costs.


MONDAY, JUNE 13, 1988