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

120 Pages Posted: 24 May 2019 Last revised: 8 Feb 2021

See all articles by Hunt Allcott

Hunt Allcott

New York University (NYU)

Benjamin B Lockwood

University of Pennsylvania - The Wharton School

Dmitry Taubinsky

University of California, Berkeley - Department of Economics

Date Written: May 2019

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.

Suggested Citation

Allcott, Hunt and Lockwood, Benjamin B and Taubinsky, Dmitry, Regressive Sin Taxes, with an Application to the Optimal Soda Tax (May 2019). NBER Working Paper No. w25841, Available at SSRN: https://ssrn.com/abstract=3392762

Hunt Allcott (Contact Author)

New York University (NYU) ( email )

Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States

Benjamin B Lockwood

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Dmitry Taubinsky

University of California, Berkeley - Department of Economics ( email )

579 Evans Hall
Berkeley, CA 94709
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
22
Abstract Views
434
PlumX Metrics