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The seven deadly flaws of sin taxes

Friday, 10 November 2017

The seven deadly flaws of sin taxes

Exactly why free-thinking people should make unwise decisions has troubled economists since the beginning of economics.

In his seminal book on the topic, Wealth and Welfare, British economist Arthur Pigou (1877-1959) quoted Ancient Roman poet Ovid: “Video meliora, proboque, deteriora sequor (I see better things, and approve, but I follow worse).”

Or to put it in a modern context: “I know I should spend my money on fruit and vegetables, but stuff it, another schooner please, barman.”

Pigou attributed this ill-judgment to the “relative ignorance of the poor”.

If anything has changed since then, it is that governments have assumed a mandate to alleviate this “ignorance” by imposing taxes on the misbehaving masses.

Disturbingly, people these days increasingly approve of this new function of government. Surveys in Australia regarding use of plastic shopping bags and in the United States regarding sugar consumption reveal a strange, subservient willingness of people to request financial incentives to behave the way they think they should.

Like Bob Menzies, we believe that the collective good is seldom served by curtailing individual liberty or denying personal responsibility.

Sin taxes are almost always an appalling overreach of government. They undermine the very foundations on which our prosperity is based. Herewith, we present the seven deadly flaws of sin taxes:

  1. They are regressive. Sin taxes sound simple in theory but quickly become complex. Which products should be exempt? At what stage should the tax be imposed? How should compliance be policed? To add a means test to this would make them too unwieldy even for the most ardent bureaucrat. So they are invariably flat taxes. As such, they punish the poor the most.

  2. The are too focused. So you want to reduce sugar consumption. The nutritional ambiguity of such an objective notwithstanding, it is impossible to apply a tax on one sugary item and assume that the demand will not shift over to another. The frequently proposed tax on soft drinks in Australia, for example, will probably reward manufacturers of other unhealthy foods.

  3. Compliance costs are too high. It’s difficult enough running a corner shop or nationwide supermarket chain without also having to record the number of litres of Coke that have passed over your counter. This stifles commerce and creates jobs only for bureaucrats and black marketeers.

  4. They are too broad. Sin taxes are paid by all consumers of a product, regardless of how sinful the purchase is. An elderly couple enjoying a bottle of wine with dinner pay the same disincentivising tax as a young alcoholic.

  5. They are easily avoided. Can’t afford your favourite brand of sinful product? No problem. Buy a cheaper brand. Or shop where the taxes are absorbed.

  6. They lack empirical evidence. Few studies have been able to prove a link between the sin taxes and demand. Other factors - education, social changes, legal restrictions, stigmatisation - might also affect demand.

  7. They are illiberal. Western society is founded on the sanctity of free choice and personal responsibility. Every measure to reduce those is a step towards totalitarianism. - Fred Pawle

On Tuesday, the MRC will release a new report, Fat Chance: Why sugar taxes don’t work

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