5 April 2018

Sin taxes don’t do what their advocates claim


According to The Lancet, deaths from non-communicable diseases are rising globally and that something must be done about it. This is a strangely negative spin on what is fundamentally good news. In fact, it is a result of the great victories of us humans against pestilence.

We are all going to die of something and if we don’t get felled by smallpox, cholera or polio then we will survive to die of heart problems and cancers. We have dealt with smallpox, we are with polio, and cholera is at least treatable these days and also largely prevented by good sewage systems. The portion of human deaths from non-communicable disease rising is a victory not a defeat.

Having cast this development in the worst possible light, the Lancet then moves on to insisting that sin taxes – levies on sugar, tobacco, alcohol and other goodies – must be increased in order to prevent these deaths.

Here they’ve not quite grasped the economic implications of such prevention. Failing to treat lung cancer is a great deal cheaper than failing to cure Alzheimer’s for a decade – people dying young saves money for a health care system. And so the claim that we should tax tobacco, for example, because of the cost of smoking to the NHS just doesn’t stack up.

That said, there are indeed excellent reasons for sin taxes. The main one is quite how much we like sinning. That makes it possible to load heavy tax burdens on the tabs and toping before people stop doing them, meaning we can raise lots of money this way.

Which is, of course, a key point of a desirable tax system, that it raises revenue without distorting decision making too much. In other words, the doctors have it the wrong way wrong. If sin taxes are desirable, it’s because they don’t actually change our behaviour that much.

But the biggest economic mistake here is to manage to get the burden of such taxation the wrong way around. As The Guardian explains it: “The experts analysed the effects of taxes on sugary drinks, tobacco and alcohol in countries that have introduced them and found that the criticism that they are regressive – penalising the poorest – is unfounded.”

That’s really quite a remarkable claim, and the result of getting the definition of regressive wrong. They go on to tell us that it is those poor who change their behaviour most when subject to such taxation – telling us that the burden falls more heavily upon those poor, the definition of regressive here.

What they’ve done is look at who ends up paying the revenue which sin taxes produce. Sure enough, people rich enough to buy lots of naughty things pay more of the tax. This is then used as their argument that, since the richer are paying more of the tax burden, this isn’t a regressive tax, it’s a progressive one. But that’s not how these words, concepts, are defined.

Think on it. We tax Bill Gates at 1 per cent of his income, we tax some random welfare receiving family at 2 per cent of theirs. The vast majority of our revenue comes from the Microsoft founder but we’d not call it a progressive tax, would we? Because it isn’t, our definition depends upon the portion of income which vanishes in said taxation. The poor are paying 2 per cent of income, the rich 1 per cent, that’s a regressive tax.

Sin taxes are a higher portion of low incomes than they are of high incomes, that makes them regressive taxes. There’s nothing more to it.

It is, of course, exactly because such sin taxes bear more heavily upon the incomes of the poor that the poor’s reaction to them is greater. That very proof they use, that the effects upon health are progressive is exactly what shows us they are wrong: because it bears more heavily upon the decisions and actions of the poor.

This may sound persnicketty, but can we at least try to stick to a useful little idea: that those who would pronounce upon how we should tax know something about tax. Is that too much to ask of those basing arguments for a sin tax on faulty economics?

There’s a broader point at play here. Think through what is really being said. The poor should be taxed mightily upon the little pleasures they can afford – as George Orwell pointed out, those pleasures being little but most comforting – in order that they might die in manners that those who write The Lancet approve of. Not the way to run the world to my mind.

Tim Worstall works at the Adam Smith Institute and Continental Telegraph.