Sin Tax Economics Made Simple!

As a nice follow up to my previous post on the proposal to increase the tobacco tax, Americans for Tax Reform today provided a neat children’s guide to sin-tax economics:

It’s a fundamental principle of economics known to every freshman econ major: if you raise the price of something, demand for it will go down. Keep raising the price, and you’ll end up with less money than you started with. A concept so simple, even a child could understand it (see graph).

Yet such simple common sense continues to elude lawmakers, who seem to think they can just keep raising taxes and tap into an unlimited pool of cash.

Statistics released in Kentucky last week once again demonstrate the foolishness of such an approach. Kentucky lawmakers passed a whopping tax hike on alcohol and … tax receipts fell 55%. In fact, in the last year, consumption and wholesales tax revenue dropped by a whopping $1.75 million.

Of course, Kentucky legislators should have been aware of this – just look at the effects of revenue raising alcohol taxes in the past: the last time the federal government raised the distilled spirits excise tax, it took 11 years to bring in more revenue. And look at what happened with tobacco tax hikes. New Jersey raised the cigarette tax 17.5 cents in 2007. They collected $52 million less than they had projected and $22 million below what they collected before the tax hike. Maryland raised the cigarette tax $1, in 2007 sales dropped by 25% and there was a 254% increase in cigarettes illegally crossing state lines. When Arkansas passed a 56-cent tax hike on cigarettes in February, revenue projections were lowered by $14 million just one month after passage.

Hiking taxes hurts consumers and kills jobs – and doesn’t even raise revenue. There’s a good reason why friends don’t let friends hike taxes.

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14 Responses to “Sin Tax Economics Made Simple!”

  1. Manny C Says:

    Looks like you are doing some snipping of posts. What happened to the minimum wage post?

  2. Tim Andrews Says:

    Wow – well spotted! That was only up for something like 30 min at, what, 3am Australian time and wasn’t advertised!
    Um essentially as it used the same joke as this post – which was more relevant – thought it would just be best to replace it with this.

  3. Manny C Says:

    Call it the benefit of using RSS.

  4. Tim Andrews Says:

    Ahh of course!

  5. Adam Gwynne Says:

    Is there not an argument that by stopping people partaking in the sin, money is saved elsewhere in the budget (albeit on a longer timescale)?

  6. Justin Lee Says:

    You cannot use the effect of tax hikes in individual states of the US to model their impact in Australia, especially when considering a Commonwealth-imposed tax increase. The smuggling that occurred between states would explain at least some of the drop in sales – I doubt you would see such an increase in cigarette smuggling with people entering the country from overseas.

  7. Tim Andrews Says:

    It’s really not that hard to buy cigarettes from the internet online, and I something more and more people are doing.

    And Adam – I doubt it, the increased health costs are generally offset by the reduced life span resulting in less pension payouts.

  8. Clinton Says:

    I wouldn’t mind sin taxes if they were all added together, and divided evenly and taken off everyones tax bill.

    I’d prefer a world without sin taxes, the income tax and the GST, but if we’ve got to keep at least one, I’d rather sin taxes over the others.

  9. TerjeP (say tay-a) Says:

    Today I learnt that Tim has a cat. 😉

  10. Tim Andrews Says:

    Haha – that graph wasn’t actually made by me, and don’t actually have a cat – sorry to dissapoint!

    Clinton – sin taxes which are revenue neutral are certainly preferable, however, I really don’t like the nanny-state social engineering and value judgments they entail.

  11. Ashley Millsteed Says:

    All very relevant, assuming that we’re actually near or at the top of the curve.

  12. Scott Says:

    It’s amazing how many people miss a simple point. Recently I was debating with some striking Aircraft Engineers (or as I liked to call them – socialists) . A point was made “Well they (QANTAS) could just raise the ticket price by $15 and pay us all more. That’s all we are asking”. My point to these socialists was that if QANTAS could raise the price of tickets $15 and pay them (without effecting profit) , why hadn’t QANTAS raised the ticket price by $15 and pocketed the money. Yes, you and I both know the reasons why – what’s funny is that these idiots think managing a company is that simple.

  13. Scott Says:

    Another good example of this was the Hawke / Keating government increasing the luxury car tax to (from memory 105%). Revenue declined and they had to reverse it.

  14. Says:

    What’s up, of course this piece of writing is in fact fastidious and I have learned lot of things from it on the topic of blogging. thanks.

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