Working Paper: NBER ID: w25841
Authors: Hunt Allcott; Benjamin Lockwood; Dmitry Taubinsky
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 sufficient statistics formulas 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 in our model, using Nielsen Homescan data and a specially designed survey measuring nutrition knowledge and self-control. Holding federal income tax rates constant, we find an optimal federal sugar-sweetened beverage tax of 1 to 2.1 cents per ounce in our model, although optimal city-level taxes could be as much as 60% lower due to cross-border shopping.
Keywords: sin taxes; soda tax; behavioral economics; optimal taxation
JEL Codes: D9; H0; I1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| optimal sin tax (H21) | price elasticity of demand (D12) |
| price elasticity of demand (D12) | optimal sin tax (H21) |
| bias among lower-income consumers (D12) | optimal sin tax (H21) |
| concentration of consumption among poor (D19) | optimal sin tax (H21) |
| optimal sin tax (H21) | welfare maximization (D69) |
| consumer biases (D91) | optimal tax policies (H21) |