Regressive Sin Taxes, with an Application to the Optimal Soda Tax*

Author:

Allcott Hunt1,Lockwood Benjamin B1,Taubinsky Dmitry1

Affiliation:

1. New York University, Microsoft Research, and NBER University of Pennsylvania, Wharton School and NBER University of California Berkeley and NBER

Abstract

Abstract A common objection to “sin taxes”—corrective taxes on goods that are thought to be overconsumed, such as cigarettes, alcohol, and sugary drinks—is that they often fall disproportionately on low-income consumers. This paper studies the interaction between corrective and redistributive motives in a general optimal taxation framework and delivers empirically implementable formulas for sufficient statistics for the optimal commodity tax. The optimal sin tax is increasing in the price elasticity of demand, increasing in the degree to which lower-income consumers are more biased or more elastic to the tax, decreasing in the extent to which consumption is concentrated among the poor, and decreasing in income effects, because income effects imply that commodity taxes create labor supply distortions. Contrary to common intuitions, stronger preferences for redistribution can increase the optimal sin tax, if lower-income consumers are more responsive to taxes or are more biased. As an application, we estimate the optimal nationwide tax on sugar-sweetened beverages, using Nielsen Homescan data and a specially designed survey measuring nutrition knowledge and self-control. Holding federal income tax rates constant, our estimates imply an optimal federal sugar-sweetened beverage tax of 1 to 2.1 cents per ounce, although optimal city-level taxes could be as much as 60% lower due to cross-border shopping.

Publisher

Oxford University Press (OUP)

Subject

Economics and Econometrics

Reference89 articles.

1. The Welfare Effects of Misperceived Product Costs: Data and Calibrations from the Automobile Market;Allcott;American Economic Journal: Economic Policy,2013

2. Tagging and Targeting of Energy Efficiency Subsidies;Allcott;American Economic Review,2015

3. Ramsey Strikes Back: Optimal Commodity Taxes and Redistribution in the Presence of Salience Effects;Allcott;American Economic Association Papers and Proceedings,2018

4. Replication Data for: ‘Regressive Sin Taxes, with an Application to the Optimal Soda Tax;Allcott

5. Energy Policy with Externalities and Internalities;Allcott;Journal of Public Economics,2014

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