The Acton Institute recognizes the importance of the free economy operating with minimal government regulation. We believe a strong commitment to private property rights for the development, use, and distribution of new and innovative technologies, is vital to meeting human needs. Taxation, while a realistic necessity, should then be kept to an absolute minimum–both in rates and in implementation–so as not to hinder human industriousness and innovation.
"Sin Taxes" are so called because they are levied on those commodities, such as tobacco and alcohol, which are the objects of widespread disapproval. "Such taxes," Paul Samuelson says, "are often tolerated because most people—including many cigarette smokers and moderate drinkers—feel that there is something vaguely immoral about tobacco and alcohol. They think these "sin taxes" stun two birds with one stone: the state gets revenue, and vice is made more expensive."
"Sin Taxes" is not a technical term in economics. They are simply forms of excise taxes. What, then, is an excise tax? It is a tax levied on some but not on all commodities. This is how it differs from the general sales tax, which is levied on all products (with certain minor exceptions). This means that it is levied in addition to the sales tax. Excise taxes have a long history. Remember the infamous salt tax under the French monarchy? There was the notorious tax on tea that was levied in the American colonies, which led to the Boston Tea Party and prepared the way for the American Revolution. Students of American history will recall the Whisky Insurrection, which occurred during the administration of George Washington. This rebellion grew out of resentment over an excise tax on whisky.
The long run effect of an excise tax is a reduction in the supply of the commodity on which the tax is levied. This in turn tends to lead to an increase in the price that consumers have to pay. How does this work itself out? If those who market the item continue to produce it in the same quantity, they will not be able to put up the price. If the consumers had been willing to pay the original price plus the tax, the producers could successfully have charged that amount in the absence of the tax. This would show that they had been charging less than the traffic would bear. And why not charge more for the product? After all, would they not have been taking advantage of any inelasticities of demand before the imposition of the tax?
So, if they continue to sell the same amount of the product on the market with the newly imposed tax, they will be unable to get any more than the old price. Since this price will not compensate them for the now higher costs of doing business, some firms will have to reduce the supply of the goods in question. The exiting of marginal firms from the industry as a result of the higher taxes contributes to the reduction of supply. This highlights the fact that producers do not directly control the prices at which their products will sell. Supply and demand determine the selling prices.
It is only by altering the supply or the demand that they are able to modify the price. And for all practical purposes we can rule out increasing demand as a means to offset higher production costs. Why? Because if manipulating demand was possible, they would have done so before the increase in production costs. So what changes the price is the diminution in the supply of the commodity. And, of course, this decrease in supply means that less of the article will be consumed.
What, then, are we to think of excise taxes? That depends, to no small degree, upon what we think of taxes in general. What is their purpose? Generally, it is to raise revenue for the government. In that case, we have to ask ourselves whether we want the government to have that revenue. The purpose of this revenue is to finance government spending. It is the spending rather than the removal of the money from our pockets that constitutes the main problem. Here is how Milton Friedman puts it in Tyranny of the Status Quo : "However the government gets the money it spends, the goods and services that it buys, or that are bought by the people to whom it transfers money, are thereby not available for other use. Those goods and services—not the pieces of paper that pay for them—are the real cost of government to the taxpayers."
If the government were to take the money and toss it into the furnace, the main effect (supposing even handed taxation) would be a decrease in the money supply. The remaining money would be sufficient to buy the same amount of goods and services because of the consequent reduction in prices. What matters, therefore, is the government’s take in real terms: the goods and services that are no longer available and the consequent increase in prices. All the economist can do is to point out these costs. Whether they are worth bearing is a judgment call of another sort.
But here is a fact that escapes the notice of most people. It is not the case that the goods and services delivered by the government are in addition to the goods and services that were available before the government spending. They are instead of goods and services that would be otherwise available. Even people who do not pay taxes find themselves paying for these goodies in the form of higher prices for the things they really want. Politicians typically do not inform their constituencies of the cost that the benefits entail. When asked whether we want these things, we ought always to ask ourselves: "instead of what?" If people did this, they would be much less willing to endorse the current amount of government spending.
As we mentioned before, people are sometimes willing to accept excise taxes on such "sinful" articles as tobacco and alcohol out of a feeling that these are a legitimate punishment for such indulgences. It is, therefore, not surprising that the government should eagerly tax these particular articles.
Sometimes, of course, the announced purpose of these taxes is to discourage the use of the product. They indeed do so if only because they decrease the quantity of the good. Many will wonder whether such paternalistic activity on the part of the government is warranted. They will ask themselves what makes politicians better judges of what is good for us then we ourselves or those persons in whose judgment we have confidence. Not only that–will the government stop there? Most likely not. The government is now threatening to move in on the use of vitamins and other nutritional items. We have come a long way from the days when it was accepted that the sole purpose of government was to protect the rights that were enumerated in the Declaration of Independence.
On occasion, "sin taxes" are defended because supposedly they both raise revenue and discourage the use of the sinful product. As John Bloom, the American Cancer Society’s policy director said, "Canada has proven that tobacco taxes save lives and raise revenue." But one might ask whether a collision course is imminent here. Sin taxes do not raise revenue unless people use the product, and they do not save lives unless people avoid the product. Will not many of those who want to raise the revenue want people to commit the sin of using the product?
We can take comfort in the fact that a backlash seems to be finally taking place. According to the Feb. 9, 1994, New York Times, the Canadian Prime Minister, Jean Chretien, announced that Canada was slashing taxes on cigarettes to try to stamp out widespread smuggling from the United States, where taxes are currently about one-fifth as high. This shows that there are limits to what people in our day are willing to accept. Perhaps the great achievements of Thatcher-Reagan is not their legislative successes, but their shifting of the burden of proof from the private sector to the government.