The Theory and Practice of Selective Consumption Taxation

Selective consumption taxes apply to specific goods rather than to a broad range of goods. Policymakers justify these taxes on the basis of the goal of reducing societal problems — like the consumption of alcohol or cigarettes — and nudging consumers toward healthier choices. But this chapter shows that selective consumption taxes are being applied to more and more goods, and they fail many of the criteria for sound tax policy. Selective consumption taxes fail the neutrality criterion. Economists support “neutral” tax policies that do not distort consumer choice. Sin taxes, with the stated goal of reducing the consumption of selected goods that consumers want to buy, violate neutrality. Selective consumption taxes also fail the equity criterion. Because consumers pay sin taxes based on their individual choices, people with similar incomes may face different tax burdens. The costs of sin taxes tend to fall hardest on low-income people, who tend to spend a higher percentage of their income on excise taxes