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"The Sin Tax: Economic and Moral Considerations" de Robert A. Sirico

The search for government revenue in fiscally tight times tempts legislators to raise revenue by imposing unusually high excise taxes on cigarettes, liquor, gambling, and so on. This type of charge, often called a "sin tax," appeals to voters who view it as a way of discouraging consumption of certain objectionable products. Yet the temptation to impose sin taxes is one that should be resisted for economic and moral reasons. The consequences of the sin tax are often the very opposite of those intended by its designers. Rather than increasing revenue, the sin tax can reduce it. Rather than discouraging what are regarded as morally questionable behaviors, the sin tax can make them more appealing. Rather than reducing what are perceived to be internal costs of the sin, the sin tax can increase them and expand them to society as a whole.

The sin tax, moreover, fails to consider the crucial distinction between vice and crime. Before we empower the government with what are, effectively, pastoral responsibilities, we ought to consider fundamental issues regarding the interplay between private morality and public policy.

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If the costs of production, distribution, and consumption get too high, the effect will be to create "informal" or "underground" markets for goods and services. The term "informal" refers to a good or service that is legal yet distributed through channels that are officially unapproved (de Soto 1989). This informal effect is something that must be considered in all forms of interventionism, but it is a particular problem for sin taxes. Precisely because the good or service being taxed is less socially approved than other goods or services, unscrupulous individuals are likely to take over the job of supplying the consumers with what they want.

Canada's experience with cigarette taxes provides a poignant case. Throughout the '80s and early '90s, Canadian and American smugglers met at the border, many driving in snowmobiles so as to avoid customs agents. Violence and gunplay increased. Apparently most of the cigarettes being brought into Canada in underground markets were actually manufactured in Canada, exported to the United States, and brought back into the country by disreputable elements. The same wholesalers have been known to buy back the cigarettes and sell them again.

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When the Canadian government threw up its hands and lowered the tobacco tax, it did not admit that the real reason had to do with the violence and social chaos it caused. It said the change was in the interest of raising more revenue, a perfectly understandable rationale as well. If a good portion of the market went underground, the state would indeed lose substantial revenue.

This raises another peculiar aspect of the sin tax. It is contradictory at its very heart. At some point in the "revenue curve," the tax will tend to reduce rather than increase government income, especially when people choose informal means of getting the desired product. When that occurs, it defeats a major purpose of the sin tax in raising revenue in the first place. On the other hand, increasing revenue might actually require propaganda to induce people to continue consuming. But that would defeat the moralists' reasons for imposing the tax in the first place.

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When government imposes high costs on a good that consumers desire, consumers will attempt to find ways to feed their personal desires at low cost. This propensity will make any form of sin tax backfire in terms of its overall impact on sin itself. This is due to the "more-bang-for-the-buck" principle. If cigarettes are taxed at a high rate, some consumers might turn to cigarettes that have a higher nicotine content, including those that are unfiltered. If wine is taxed excessively, wines of higher alcohol potency become more desirable than those of lower potency. In the same manner, taxation on soft drugs inadvertently promotes harder drug use, since, as the principle says, people seek out more-bang-for-the-buck, especially when a noticeable part of that buck is going to pay the sin tax (Thornton 1991, 89-138).

The sin tax and monopolization of the provision of sin (as in the alcohol example) are the halfway house to total prohibition. For that reason, it is impossible not to notice the parallels between the recent Canadian experience and the American era of Prohibition, which lasted from 1919 to 1933. The entire country became engulfed in a crime wave, while statistics reveal little if any difference in actual alcohol consumption. The worst elements of society -- those willing to take enormous risks with the law -- made handsome profits, while the peaceful users of these supposedly sinful products paid high prices for their goods. The Prohibition era ended up making a mockery of the law. Even otherwise law-abiding people were dragged by their desire for the "sinful" product into underground markets, lessening their overall respect for the government and authority in general.