Question

One common argument for imposing so-called sin taxes is the social goal of reducing demand for such products. Using cigarettes as an example, is there a segment of the population that might be sensitive to price and for whom high taxes might discourage purchases? If the goal is to reduce the demand, then shouldn’t the tax be proportional to income and not the same amount for everyone? In other words, those individuals who make more money will continue to smoke because they can afford to pay the so-called sin tax.

Required: Initial post must be 200-400 words

Answer 1

Taking the example of cigarettes, if we assume that a flat rate of tax is imposed on the product, only a small portion of the population will be affected. This will be the segment to which changes in the retail price of daily products makes a significant difference. As a result, demand from that price sensitive segment will reduce. However, the portion of the economy which makes more money will be relatively price insensitive to these changes. The tax charged on such products should therefore be proportional to income earned and not the same for everyone. Since the goal here is to reduce demand and not increase taxes, the ideal approach will be to set slab rates for such sin taxes. Since the same is being done proportional to the income, it will result is higher taxes as well. Higher sin taxes enables the government to provide better health facilities to treat the effects of such activities.

Since higher taxes reduce demand for the product, it will in turn discourage the producers from producing more of the product. The end goal of such sin taxes is to almost entirely eliminate such products in the market. A more practical goal would be to set a level of demand to which the current level must be brought down to. While setting out the rates according to the income levels, the goals can be set according to demand.