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.
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.
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:
equity test: Does the burden of the tax vary directly with
the taxpayer's ability to pay?
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?
benefits-received test: Does the burden imposed by the tax
correspond roughly to the benefits that the taxpayer derives
from government expenditures?
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.
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.
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.
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.
taxes are objectionable, finally, because the burdens imposed
by them bear no rational connection with the benefits of government
good tax system is one in which taxpayers pay for government
services roughly in proportion to the benefits that they receive
from those services.
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.
JUNE 13, 1988