So-called “sin” taxes present numerous pitfalls, says a new study from the Institut économique Molinari (IEM)

Media Release

Paris, Thursday, January 30, 2014 – Using a need to change consumption habits as the pretext, various new “behavioural” taxes have been proposed: Denmark’s fat tax, France’s Nutella tax and soda tax, and so on.

While such “sin taxes” may be politically attractive, exploiting tax policy in this way causes all sorts of undesirable effects without even changing consumption patterns.

No improvement in public finances

The argument that behavioural vices produce “social costs” estimated at billions of euros annually is used to suggest that eliminating them would help strengthen public finances.

This idea does not stand up to broad analysis of the issue, especially when we observe that people who engage in their “vices” (tobacco, alcohol, obesity, etc.) have unfortunately lower life expectancies than other people.

People with healthier lifestyles actually create additional costs in areas such as health care and retirement. These added costs may offset or even exceed the extra costs generated by consumers of “sinful” products and prevent the strengthening of public finances.

Studies show the following results:

• Tobacco: If there were no smokers, health care costs would have been 7% higher among men and 4% higher among women (Netherlands).

• Health care costs for non-smokers and non-obese people: Nearly 28% more than for smokers and 12% more than for obese people (Netherlands).

• Net financial impact of smoking: $0.32 more per pack of cigarettes sold, in other words “savings” for the public treasury, without taking account of tax revenues from tobacco (United States).

Even if vices were found to burden the public accounts, this is because governments, by imposing compulsory public systems, especially in the field of health care, have cast aside risk assessment related to tobacco, obesity, etc.

Unexpected effects on public health

Though official sales of overtaxed products could well decline, consumers tend to substitute other products that are just as harmful or even more so, to the detriment of the health goals put forth by public authorities.

Various studies have clearly brought out these undesirable effects:

• Soda taxes: Little or no effect on obesity, with children and teenagers in particular turning to other high-calorie drinks that cost less (United States).

• Fat tax: Substitution effect through cross-border purchases or through purchases of less expensive and often lower-quality products (Denmark).

• Alcohol taxes: Substitution effect through less expensive and/or stronger drinks; substitution by other drugs (such as cannabis).

• Tobacco taxes: Substitution effect through cheaper cigarettes or by smoking more intensely (with more nicotine or tar absorbed per cigarette).

The cause of the black market and illicit trafficking

Sin taxes automatically open the way to parallel markets, whether in the form of cross-border purchases (as with the fat tax in Denmark) or black market purchases, which taken together may account for 10% of the market for alcohol in the United Kingdom and 20% or more of the market for cigarettes in France.

What lies at the root of contraband is not the nature of an overtaxed product in itself or the associated “vice” but rather taxation, which is the necessary and sufficient cause. The proof of this is that heavy taxation of products as ordinary and “virtuous” as salt (with the example of the gabelle in France in the 17th and 18th centuries) or soap (as in England up to the mid-19th century) quickly makes them the object of contraband, accompanied with its share of crime, corruption and increased violence.

Titled The pitfalls of so-called “sin” taxation, the study prepared by Valentin Petkantchin, associate researcher at the Institut économique Molinari, is available on our website.

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The Institut économique Molinari (IEM) is an independent, non-profit research and educational organization. Its mission is to promote an economic approach to the study of public policy issues by offering innovative solutions that foster prosperity for all.

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Information and interview requests:

Cécile Philippe, PhD

Director, Institut économique Molinari

cecile@institutmolinari.org

+33 6 78 86 98 58