The Wages of Sin: On Alcohol and Tobacco Taxes

People commonly associate politicians with taxes, drink, and debauchery. ‘Sin taxes,’ which are often levied on physically and, allegedly, socially unhealthy products allow policy makers to combine these fixations. Motivated by a desire to discourage excess and harmful decisions, governments target tobacco and alcohol with such excises.

The assumption that sin taxes meaningfully reduce consumption of unhealthy products buttresses the notion that these taxes protect individuals from damaging themselves and society. Intuitively, this assumption seems reasonable: people weigh benefits and costs in making decisions and, thus, increasing taxes correspondingly increases the cost of consumption.

But to what degree?

‘Sinful products’ typically have inelastic demand–that is, price increases generally do not reduce how much people consume them. This allows alcohol and tobacco companies to push the tax burden onto the consumer by increasing prices without selling substantially less wares.

Rather than significantly curb unhealthy consumption, therefore, sin taxes increase costs for those dependent on addictive products.

General sales taxes, for instance, tend to be regressive. Furthermore, taxing goods on which many vulnerable people feel compelled to spend their money is even more regressive. This is especially the case for addictive cigarettes.

Evidence suggests that individuals purchase increasingly potent variants of alcohol and tobacco as prices rise. When individuals have less access to the products they demand, they are more willing to surrender their health and comfort to get the most out of any given product. In the case of alcohol and tobacco, it is the physical stimulation provide by these drugs. As a result, individuals respond to price increases by purchasing stronger and lesser-quality alcohol and tobacco.

Higher consumer prices affect desperation in a myriad of other ways. When government-approved products are inaccessible due to their high prices, for example, individuals may turn to black markets in which targeted goods are even more dangerous (and in which criminals receive the profits). Unfortunately, for consumers, contraband tobacco and alcohol is especially risky.

Suppose, however, that sin taxes do reduce consumption of unhealthy goods. Is this a favourable outcome?

Those who dislike booze and cigarettes can choose themselves to abstain. There is no need to force this preference on others. In addition, as long as drinkers and smokers harm themselves only, advancing public goods to restrict choice in this manner is untenable.

However, what of people who cannot control themselves?

Alternatives exist for reaching out to addicts seeking help without burdening casual users. Take limits, for instance, chosen by individuals but enforced by states, such as Missouri’s voluntary blacklist for gamblers. A similar policy, such as an opt-in for alcohol and tobacco restrictions, respects individual agency while also addressing the potential harm of poor choices.

On balance, sin taxes often harm those they intend to safeguard while also restricting individual choice. Canadian governments should scale them back and take note of the benefits. I am confident that such policies, if implemented, would speak for themselves better than I could.

Michael Sullivan is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute

One thought on “The Wages of Sin: On Alcohol and Tobacco Taxes

  1. Why don’t you talk about any studies that discuss the effects on whether these taxes reduce consumption? …by how much? What about the free healthcare these people recieve for their lung cancers? Where does the tax money come from?

    are you basically positing that the extra money saved by the people is significant to change their overall lifestyle?

    and although demand is inelastic, it is not PERFECTLY inelastic, the consumption does go down slightly, and the government takes in taxes which can compensate for the health/social cost

    Sounds like the only real solution to me when you have socialized healcsre etc

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