Of Course Sin Taxes are Regressive

Abstract

There should be no debate about whether taxes on food, alcohol, tobacco and soft drinks (‘sin taxes’) are regressive. It can be easily demonstrated empirically, and countless studies have done so. As with most indirect taxes, they take a greater share of income from the poor than from the rich in all plausible scenarios. Sin taxes are regressive if we look at income groups and are even more regressive if we look at individual consumers. They are regressive in the short term and over the life-cycle. Alcohol taxes tend to be less regressive than tobacco and soft drink taxes as a result of high-income groups spending more money on alcoholic drinks, but they remain regressive in most countries. Some advocates for sin taxes claim that they produce health benefits that are progressive, i.e. they disproportionately benefit the poor. Decades of high taxes on tobacco and alcohol in many different countries suggest that this is not true. Despite very high rates of duty, smoking is much more common among low-income groups in Britain and whilst alcohol consumption is lower among these groups, rates of alcohol-related harm are considerably higher. Early evidence casts serious doubt on whether sugary drink taxes have ‘progressive’ health benefits either. Low-income consumers do not seem to have particularly elastic demand for sugary drinks. Even if they enjoyed disproportionate health gains from sin taxes, they would still suffer a net loss to their welfare and the tax would remain regressive in the traditional sense. Excise taxes raise significant sums of money and are relatively easy to collect. It is unrealistic to expect government to be entirely funded by taxes on the rich. Not every part of the tax system can be progressive, but advocates should be honest about the disproportionately high burden of sin taxes on low-income households.