This is a draft of a paper I am preparing. Comments very appreciated.
There is a long history of governments taxing activities they disapprove of. In 1604, England’s King James I concluded that tobacco smoking was ‘a custom loathsome to the eye, hateful to the nose, harmful to the brain, dangerous to the lung’ (Brandt (2007, p. 21)). He responded by increasing the import duty on tobacco by 4000 per cent – an early hefty tax on ‘sin’. This was a severe response but non-tax restrictions at this time in history were more severe. In Turkey, Sultan Murad IV had pipes driven through the noses of those found smoking either immediately before or after their beheading! Indeed, Murad IV would patrol the streets and, if he saw a soldier using tobacco or alcohol, would kill the soldier on the spot with his mace.
Despite these discouragements alcohol consumption, smoking and gambling continued to flourish even though they remain heavily restricted in modern times. In Australia, cigarette taxes amount to about $5 on a 20 pack. Alcohol is taxed in various ways. Full strength beer is taxed at $38 per litre of alcohol, spirits at $60-42 per litre alcohol while wine is taxed on its value (ATO, 2008). These charges add significantly to the cost of having a drink. Finally, gambling taxes, particularly those imposed on the most popular form of legal gambling in Australia, namely on gaming machines, provide 9.5 per cent of ‘own source’ state government revenue (Commonwealth Grants Commission, 2008).
Taxes on sin goods need not target sin
Taxes can be levied on ‘sin goods’ on grounds that have nothing to do with their claimed propensity to corrupt morals. Since taxes are needed to fund public spending, one way of selecting them is to find goods yielding much tax revenue but which impose low distortionary costs. Frank Ramsey (1927) showed the best way to do this was to levy taxes on goods in inelastic demand. Cigarettes, alcohol and activities, such as compulsive gambling, have inelastic demands because they are addictive. Taxing sin goods therefore yields good revenues while not impacting much on economic activity.
These revenue objectives provide part of the explanation for current taxes on sin. Tobacco demand elasticities lie between -0.25 to -0.5 so a 10 per cent tax increases tax revenues by 5 to 7.5 per cent (Chaloupka et al., 2001). Price elasticities for alcoholic beverages are around -0.6 so a 10 per cent tax augments revenues by 4 per cent (Selvanathan et al., 2004). The evidence on gambling is mixed since, as has been known from Suits (1979), the demand for gambling on such things as horse racing is probably elastic suggesting a limited ability to yield tax revenues. But with respect to repetitive gambling activities such as gaming machines – these are more addictive - work by this author suggests relatively inelastic demands and good revenue yields.
While governments are often accused of hypocrisy in seeking revenues rather than the moral good in taxing sin, a sensible view is that they are following recommendations of public economists who advocate such taxes when demand elasticities are low. Of course governments are using the fact that these goods are perceived as ‘sinful’ as low resistance ways of accessing revenues. However if the demand for sin goods is inelastic, policies designed to yield revenue do so because the policies will be ineffective in reducing sin (Johnson & Meier, 1990).
Externalities
Another reason for taxing sin goods arises from the externalities associated with their consumption. These are costs imposed on non-consumers by the consumption by others.
For example, cigarette smoking has dangerous effects on bystanders who inhale secondary smoke. Evidence suggests that exposure to such smoke is the most dangerous environmental exposure confronted by US citizens (NCI, 1999). This is, for example, a health concern for non-smokers married to smokers - lung cancer risks of a non-smoking spouse increase by 20-30 per cent and heart disease risks by 23 per cent (Hirayama, 1981). There are also specific dangers to children from passive smoking including increased risks of respiratory disease (DHHS, 2006). There are also damages to workers if co-workers or customers smoke in their workplace.
Excessive alcohol consumption is associated with violence, particularly within the family, while excessive alcohol consumption is the largest single cause of deaths on our roads. Around 28.5 per cent of road deaths among those aged under 65 are due to alcohol. This is a particular problem for young drivers. A driver aged 20+ who has consumed 6 standard drinks has 12 times the chance of a fatal car crash than a sober driver while, for drivers aged 16-19, the risk is 100-times that of a sober driver (Phelps, 1997).
Other alcohol-linked externalities include foetal alcohol syndrome inflicted on infants when mothers consume alcohol during pregnancy (Clarke, 2008). This reduces infant IQ.
Finally, although only 2.1% of Australians are ‘problem gamblers’, five times this percentage (comprising mainly family and work colleagues) are adversely impacted by gambling (Productivity Commission, 1999). These social costs take a terrible toll through interpersonal conflicts generated and problems in workplace performance.
Nevertheless externality arguments for taxing cigarettes, alcohol and gambling are often weaker than public finance reasons because externalities are associated with misuse rather than use per se and often have relatively low cost. The external costs associated with cigarettes are estimated at 40 cents US per pack (Gruber, 2002) and, while this is not negligible, it is dwarfed by private mortality costs of smoking for men of $222 US per pack (Viscusi and Hersch, 2007).
A more effective way of addressing externalities is often to restrict specific activities related to the external damages rather than penalising consumption generally.
For example, with respect to smoking, a better policy to reduce passive smoking damages is to restrict smoking in certain situations rather than taxing smoking per se. This is the motivation for banning smoking in the workforce, in entertainment venues and even in private cars with non-smoking occupants. The latter reform was initiated in South Australia but has now either been introduced elsewhere or is about to be. Smoking in the home that causes damage to children can be discouraged by using ‘moral suasion’ arguments which articulate the health implications for children and others of secondary tobacco smoke.
Likewise, while drinking is the major cause of traffic fatalities, the issue is not drinking per se but drinking before driving. Taxing alcohol at moderate levels will reduce this but the more sensible way to tackle accident externalities is to provide information on accident risks, particularly among adolescents, and to rigorously punish those who threaten life by driving while intoxicated. Booze buses that randomly check for intoxicated motorists, with particularly stringent restrictions on young drivers, are a more effective way of tackling this specific behaviour than low taxes on alcohol. The option of setting very high taxes on use penalises the 74 per cent of Australians who consume alcohol at levels that impose low social costs (Clarke, 2008).
With respect to gambling there are significant social costs linked to the fact that problem gamblers move inevitably towards financial ruin – the ‘gambler’s ruin’ – and end up drawing unreasonably on family and employer resources. Families are destroyed and innocent children experience deprivation as a consequence. Here the harm is excessive gambling which can be controlled if the extent of gambling can be constrained. A difficulty is that problem gamblers have relatively inelastic demands so taxes to significantly reduce gambling need to be high. Society has made the judgement that most gamblers derive significant recreational benefits at low social cost from gambling so that hefty taxes alone would again cut into the innocent pleasures of many. Better policies would target specifically problem gambling.
Several approaches have been developed. The first protects citizens from the excessive gambling that creates externalities by using electronic player cards for repetitive forms of gaming (Dickerson, 2003). These cards are issued on the usual 100 point ID requirements of a cash card. They limit the money an individual can pre-commit to gambling. For most players preferred expenditures would be within regulated limits but, for problem gamblers, such devices limit losses. This approach is currently under consideration in Victoria and other states. Another policy that limits problem gambling is the self-exclusion option that gamblers can now exercise in all states. Gamblers who, between gambling sessions, recognise that they face self-control issues with respect to gambling can elect to have themselves excluded from gambling venues.
These policies reduce costs faced by the consumers themselves, an issue we turn to.
Taxing internalities
Apart from public revenue and externality reasons for restricting sin goods a further motivation is to reduce costs consumers impose on themselves. The main issues are whether such interventions are warranted and, if so, whether taxes are the best restriction.
Historically opposition to sin goods has been based on claimed ‘moral’ costs. Smoking has long been linked to ‘illicit’ sex. This dates at least to images of flimsily dressed wenches rolling cigars on their naked thighs in the cigar factory featured in Bizet’s opera Carmen. Alcohol too has long been viewed as destructive of work ethics and family attachments. It is commonly portrayed as a lever that promotes illicit seduction of the innocent. Gambling is often seen with standard ‘materialist’ misconceptions as a degenerate ‘service’ activity that yields no useful physical output. Indeed Alexander Pope in his Rape of the Lock gives an eloquent picture of a degraded gambling woman and the corrupting influence the practice had on her. Veblen (1899) argued that gamblers impute causality into games of pure chance – psychologists term this the illusion of control - thereby making society more stupid.
For the most part, these activities are not regarded nowadays as ‘sinful’ in a narrow moral sense. Instead they are seen as costly to the individual because they imply private health and psychological costs from licit drug consumption or financial ruin from gambling.
The health costs identified go beyond the damage bills accruing to governments. They even exceed the total health costs that accrue to governments and the individuals concerned, reflecting also loss of life and increased morbidity.
Intervening to restrict consumption raises charges of ‘wowserism’ with governments disallowing free choices. Two sub-claims support this criticism. First, that governments may not have better information than private citizens and, second, that even if citizens do hold mistaken views, that they are entitled to be wrong and it is better for them to make their own mistakes. Indeed, the claim is often that government intervention to ‘protect people from themselves’ has the moral hazard consequence of creating more dangerous, risk-taking behaviours.
Some argue that interventions to limit consumption of sin goods can be justified by considering within-person externalities or internalities (Gruber, 2002/03) arising because individuals do not account adequately for the costs of actions on their future selves. The thesis is that individual decision making is time inconsistent with today’s ‘self’ being impatient but tomorrow’s ‘self’ being patient. Planning for the distant future is ‘reasoned’ and involves low impulsiveness but short-term responses are driven by the myopic emotions. Thus agents assess risky activities by hyperbolically discounting (Ainslie, 2001) with short-term impulsiveness and long-term rationality ‘fighting it out’. Paternalist policy seeks to help the dispassionate self gain control over the emotionally-driven choices considered by a conflicted individual.
Short-term selves are supposed to be strong among adolescents who engage in socially desirable experimentation to help them define adult roles but who thereby become susceptible to risky pursuits such as drugs and gambling.
In Australia almost everyone who takes up smoking does so when young: the average age of initiating smoking is 15.9 years (ABS, 2006). Such adolescents apply high rates of discount to longer-term costs of smoking. Even if they do correctly identify these costs they substantially overestimate their ability to quit the habit. These high rates of discount decline with age so when individuals are in their mid-twenties they are less impulsive and risk-loving. They then regret their decision to initiate smoking (most smokers do regret initiating the habit!) but find it unexpectedly difficult to quit. There is again a case for intervention to limit consumption.
Similarly excessive drinking, including ‘binge drinking’, is often initiated during adolescence when neuroscientists tell us that the regions of the brain involved in executive control and motivation are underdeveloped. Moreover, the vulnerability to alcoholism is greatest among those initiating drinking early in life but those with difficulties making decisions at any age - those suffering depression, anxiety, ADHD and schizophrenia - tend to be alcohol abusers (Clarke, 2008). There is again a case for limiting consumption.
These arguments are strengthened by recent evidence suggesting specific damages to brain development from consumption of alcohol (White, 2003) and tobacco (Krystal et al., 2005) during adolescence. Also relevant are internalised damages associated with drink-driving by youth that impose drastic internalised costs.
Finally, problem gambling begins at early ages. About 33 per cent of problem gamblers began betting before they were 10 years of age with 47 per cent beginning between 11 to 18 years. These youth often have co-occurring alcohol, cigarette and other drug problems that, with gambling, are correlated with impulsivity and low cognitive control (Petry, 2005).
The ethical debate concerning the case for paternalism with respect to sin goods seems academic at least with respect to youth who make flawed decisions. It remains however to ask whether tax policies are the appropriate means of initiating restrictions.
Young people have limited incomes so their demand for such things as cigarettes and alcohol are relatively price elastic. To this extent taxes will impact on consumption choices although it is doubtful that they would ever be the only policy instrument used in this context.
For example with respect to tobacco smoking, a 10 per cent increase in price leads to only a modest 2.4 to 4.7 per cent increase in cessation probabilities among US youth with uncertain impacts on smoking initiation (Chaloupka, 2001; Taurus et al, 2001). Increasing taxes to high levels provides stronger effects but encourages substitution of injurious home-grown tobaccos (‘chop chop’ home grown causes fungal infections of the lung) and the intensification of smoking through ‘puffing harder’. A 1 per cent increase in price provides a 0.4 per cent increase in smoking intensity and a new range of more dangerous adenocarcinomas lower in the lungs (Adda et al, 2006; Henschke et al, 2002).
With respect to youth there is a case for an infinite tax on smoking, alcohol and gambling activities by prohibiting them. Minimum pack sizes, bans on advertising and bans on smoking in entertainment venues are also ways of curbing youth consumption. Bans on selling to youth backed by stringent penalties and penalties on purchasing are also effective. Negative advertising that emphasises current costs of smoking and alcohol in terms of lost physical fitness provide disincentives for youth that are more tailored and carry greater clout than modest tax hikes.
At best, taxes will be one component of a package of policies that seek to restrict the consumption of sin goods by youth and by citizens more generally.
Final comments
Economists seeking to limit external and privately-borne costs of sin goods should devise policies that target problem areas as directly as possible. General policies that have broad impacts will generate by-product costs on non-targeted groups and bring about harmful substitutions that may lead to additional harm through unintended consequences. Taxes on sin reduce costly externalities and high personal health costs but are not the sole way of advancing this objective.
A strong argument for taxing sin goods is that the taxes yield revenue without distorting economic activity greatly and with low political flack. Such taxes do help restrict the damages consumers of sin impose on others and on themselves but almost always need to be supplemented by other policies to have significant impacts.
References
J. Adda, & F. Cornaglia, ‘The Effect of Bans and Taxes on Passive Smoking’, Institute for the Study of Labour (IZA),
Discussion Paper No. 2191, 2006.
G. Ainslie,
Breakdown of Will, Cambridge University Press, 2001.
Australian Bureau of Statistics,
Tobacco Smoking in Australia – A Snapshot 2004-05, ABS Canberra, 2006
Australian Taxation Office,
Excise Tariff Working Pages, Canberra, 2008.
A. M. Brandt,
The Cigarette Century, Perseus, New York, 2007.
F. Chaloupka, M. Wakefield & C. Czart, ‘Taxing Tobacco’ in R. Rabin & S. Sugarman (eds)
Regulating Tobacco, Oxford University Press, 2001,
H. Clarke, ‘The Economist’s Way of Thinking about Alcohol Policy’,
Agenda, 15, 2008, 27-41.
M. Dickerson, ‘What if there were no problem gamblers’,
mimeo, 2003.
Commonwealth Grants Commission,
Gambling Taxation, Commonwealth of Australia, 2008.
J. Gruber, ‘Smoking internalities’, Regulation, Winter, 2002-2003, 52-57.
C. Henschke & P. McCarthy,
Lung Cancer, Norton 2002.
T. Hirayama, ‘Non-smoking wives of heavy smokers have a higher risk of lung cancer: a study from Japan’, British Medical Journal, 1981, 282: 183–185.
C. Johnson & K. Meier, ‘The wages of sin: Taxing America’s legal vices’, Western Political Quarterly, 43, 3, 1990, 577-595.
J. Krystal, W. Mencl, M. Westerveld, S. Frost & K. Pugh ‘ Smoking causes cognitive and memory impairment in adolescence’,
Biological Psychiatry, 57, 2005, 56–66.
NCI,
Smoking and Health Monograph No. 10: Health Effects of Exposure to Environmental Tobacco Smoke: Report of the California Environmental Protection Agency, National Cancer Institute, 1999.
N. Petry,
Pathological Gambling, American Psychological Association, Washington, 2005.
C. Phelps,
Health Economics, Addison-Wesley, 1997.
Productivity Commission,
Australia’s Gambling Industries, Summary Report, Canberra, 1999.
F.Ramsey, ‘A contribution to the theory of taxation’,
Economic Journal, 37, 1927, 47-61.
E. Selvanathan & S. Selvanathan, ‘Economic and demographic factors in Australian alcohol demand’,
Applied Economics, 36, 2004, 2405-2417.
D. Suits, ‘The demand for gambling’,
Quarterly Journal of Economics, 93, 1979, 155-162.
J. Taurus & F. Chaloupka, ‘Determinants of Smoking Cessation’ in M. Grossman & C. Hsieh (eds)
The Economic Analysis of Substance Abuse, Edward Elgar, 2001.
DHHS,
Health Consequences of Involuntary Exposure to Tobacco Smoke: A Report of the Surgeon General. U.S. Department of Health and Human Services, 2006.
T. Veblen, ‘The sporting instinct’ in
Theory of the Leisure Class, Macmillan, New York, 1899.
W. Kip Viscusi & J. Hersch, ‘The mortality cost to smokers’,
NBER Working Paper 13599, National Bureau of Economic Research, November 2007.
A. White, ‘Substance use and adolescent brain development’,
Youth Studies Australia, 22, 2003, 39-45.
Posts
