The House Ways and Means Committee recently signed off on a proposal to tax the nicotine used in vaping products. The dangers of vaping are a hot topic right now, but this bill is but one of the latest attempts by social engineers to tax something dangerous for our own protection. While such proposals always trigger some opposition, paternalistic policies have become ever more politically popular in recent years.
In various parts of the country, state and local governments levy selective sales or excise taxes on cigarettes, vaping products, alcohol, sugary soft drinks, marijuana, chewing gum, potato chips, pretzels, milkshakes, baked goods, ice cream, popsicles, parking, illegal drugs (yes, really), playing cards, hotel rooms, fur clothing, sex-related merchandise, gasoline, electric vehicles, plastic bags, and countless other goods. Candy and red meat have recently been drawing attention.
The justification for such taxes usually sounds benevolent. Soda taxes are supposed to make us healthier by limiting weight gain. Taxes on single-use plastic bags are supposed to make our environment cleaner and oceans safer for sea life. Now, meat taxes are supposed to save our hearts and, to boot, the planet.
Despite seemingly good intentions, selective taxes make life worse for millions of Americans every day as the government increases the prices of countless consumption items, arrests tax evaders, and paternalistically makes choices for adults ostensibly living in a free society.
The problem with selective taxes is that they fail most of the criteria by which economists evaluate tax policy. Selective taxes are among the least-effective ways of discouraging undesirable consumption. In addition, selective taxes disproportionately burden low-income households, and they promote inefficient decision-making by consumers and firms.
To get an idea of how selective taxes affect consumption behavior, lets walk through the Econ 101 steps. Studies of recent soft drink taxes supply apt examples.
Step 1: Taxes increase retail prices. By how much? Evidence from the 2014 soda tax in Berkeley, Calif., suggests that about $0.43 of a $1.00 tax is passed through to consumers in the form of higher prices; soda sellers and their suppliers pay the remaining $0.57.
Step 2: Higher (tax-induced) prices predictably reduce consumption. By how much? A summary of several studies suggests that a 10 percent increase in the price of sugar-sweetened beverages would cause consumption to decline by an average of about 12 percent.
Step 3: The consumers who buy less soda because of the higher price can now purchase more of something else. What do they choose? The precise change varies from person to person, but several studies have measured the effect of food and drink taxes (and outright bans) on overall caloric consumption and weight.
Bottom Line: The results are nearly unanimous. Food and drink taxes fail to reduce weight. Where researchers have found effects, they are remarkably small.
Why do selective taxes on high-calorie food and drink fail to improve health? First, most people simply pay the tax. They buy the product because they enjoy consuming it. For the consumers who do switch, most substitute to goods with similar caloric values. Experiments revealed that food and drink taxes (or subsidies for healthful items) did not affect total caloric purchases at grocery stores. When soda was banned in schools, chocolate milk consumption increased significantly; so did the smuggling of soft drinks into schoolyards by entrepreneurial students.
The consumers who pay the tax to continue their consumption as before now are poorer. With less disposable income, Americans consume fewer organic, low-fat, and low-preservative foods, because those foods tend to be more expensive than other options.
The unintended consequences of selective tax policies can be enormous. The more heavily taxed and regulated a product, the wider is the window for illegal commerce. Cigarette smuggling is a multi-billion-dollar business. Estimates suggest that more than half of the cigarettes consumed in New York City carry no tax stamp. And when police crack down on tax evaders, they are diverted from pursuing more serious crimes; peaceful citizens who choose to buy or sell black-market cigarettes end up in jail or the morgue.
The costs of selective taxes simply outweigh any plausible estimates of their benefits. Every tax dollar raised comes directly from the pockets of consumers and producers, thereby ceding greater control of purchasing decisions to politicians.
When it comes to creating a healthier, wealthier, and happier world, more faith ought to be placed in the hands of individuals to make choices for themselves. After all, sugary soft drink sales began falling long before any city taxed them. Recipes for vegetarian and fake meat dishes are already available everywhere.