Why does the government place excise taxes on goods such as cigarettes and alcohol? Is it because these products are “sinful”? (These taxes are often called “sin taxes.”) Do you believe that excise taxes reduce consumption of these goods by very much? What does your response to the previous question imply regarding the amount of government excise tax revenue?
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Governments place taxes on goods such as cigarettes and alchohol as these products are widely used by consumers. The products are addictive, and are dangerous if regularly and widely consumed, so governments see two reasons to tax cigarettes and alcohol;
- The products will always be consumed, (unless prices rise above a theshold that would be deemed unacceptable by the public (possibly arising into a black market) so governments are able to place high taxes on these products knowing that it will result in a stable income.
- The government can use these taxes to political advantage, as they can say they are placing the taxes to act as an incentive to stop smoking or stop excess alcohol consumption.
In answering this question, we must first note that different people within a government can have different reasons for imposing or supporting a tax. There are some people who do want to impose “sin taxes” because they feel that the activities that are taxes are sinful. However, there are also people who simply want to impose those taxes because they think that those taxes are good ways to raise revenue for the government. Excise taxes on those goods tend also to be less visible than things like income taxes because they are paid in relatively small amounts each time someone buys the goods, not in a lump sum one time a year. This means excise taxes generally excite less opposition than income taxes do.
I do not believe that the imposition of excise taxes generally leads to a very great decline in the consumption of cigarettes or alcohol. In economic terms, I do not think that the demand for these goods is very price elastic. The reason for this is that people who want to smoke or drink often do not feel that there are any real substitutes for smoking or drinking. Therefore, they end up consuming nearly as much of the product even when the price goes up because of the excise tax. If I am correct about this, the amount of revenue that the government will reap from such taxes should be relatively high. People will keep buying these goods and will therefore pay a lot of tax on them. This is probably another reason why governments like to impose sin taxes; they figure that the people will not change their consumption habits and the sin taxes will bring in good amounts of revenue.
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