Theoretically "sin tax" is a good policy intervention to disincentivise a bad habit or over-consumption of a demerit good.
Sidebar: Let me quickly explain some of the terms for some non-policy folks who may have stumbled down this blog-
Sin Tax: A tax imposed by the Government on an item which is believed to have a negative effect on your physical health. For example, cigarettes or alcohol. The tax has two purposes,
a) to increase the cost of the good to make you think twice before having it, and
b) generate revenue which can ideally go into awareness and prevention campaigns.
Demerit Goods: Is simply put, something which is bad for our health if overconsumed, but we consume a lot anyway (includes items ranging from sugar to alcohol etc).
Sin taxes are often used as a policy measure to discourage the consumption of certain goods or services and help fund prevention and rehabilitation for the consumers of the same.
There is no denying that sin tax may to some extent, work. However, we perhaps overlook an important aspect while jumping to impose sin taxes as an easy solution.
The ability to tax, and the revenue generated from the tax, creates new incentives in the Government, which may be completely perverse and misaligned to the original intent. As long as the Government now generates money from an activity, money which they can easily redirect to other activities including offering freebies in the form of corporate schemes, loan waivers and other subsidies, it may not be in the interest of the Government to discourage the consumption of the good anymore.
And we can see some examples of the same;
1) Since 2016 (to my limited knowledge) the Karnataka Excise Department has been pushing bars/pubs to sell more alcohol (utilizing a rule which has already been defunct) so that they can generate more revenue. [https://lnkd.in/duWyiXBP]
2) In 2020, at the height of Covid lockdown 1, Tamil Nadu went to the SC to argue for its right to sell alcohol from its TASMAC shops. (Yes, this is not a sin tax, but the State itself selling and generating revenue. However, it only adds to the point.)
3) Recently, Kerala's State Alcohol Corporation allegedly sent notice to all shops demanding an explanation for lower sales of alcohol, leading to a flash sale of alcohol. This netted the State Department (BEVCO) over 6 crores extra income. [https://lnkd.in/dYJH6UNe]
There are multiple examples which reiterate that the moment a part of the Government generates and uses revenue from a particular activity of the general public, they may have an incentive to ensure the activity continues.
I would like to take this moment to reiterate that I am not encouraging overconsumption of some of these items. You should reduce your consumption of alcohol and cigarettes (especially these) and completely cut these out if you can. You should also take care of your consumption of sugar. A healthy lifestyle makes your life better - but that is for you to determine and not me to punish you for.
This moves us away from the incentive argument and to the question of parentalism - Is imposing a tax on an item I don’t want you to have the best way to discourage consumption?
Lysander Spooner (January 19, 1808 — May 14, 1887) an American abolitionist, entrepreneur, and lawyer in his 1875 paper, ‘Vices Are Not Crimes; A Vindication of Moral Liberty’ argued that;
“Vices are those acts by which a man harms himself or his property. Crimes are those acts by which one man harms the person or property of another…In vices, the very essence of crime—that is, the design to injure the person or property of another—is wanting.”
“To punish men for their vices…is a sheer and utter absurdity for any government claiming to derive its power wholly from the grant of the governed…because it would be granting away their own right to seek their own happiness.”
Putting a tax on an item is essentially perhaps equivalent to stating that it is now a question of affordability. As such, it is okay, if you are rich enough to afford it.
Perhaps a better way to discourage consumption would be to treat citizens as adults and education and nudge them towards a more positive lifestyle, instead of treating them as children and attempting to punish consumption.
None of us can claim to have perfectly managed our own lives. Who are we then to decide how others live their lives?