In the U.S., you pay sin taxes. In Russia, sin taxes pay you…hmmmmm, that doesn’t work at all. Anyway…
In general, there are a number of reasons that a government might want to place a tax on a particular good or service. One of the main reasons is, not surprisingly, to collect revenue. Another reason is to “internalize” negative externalities that the production and consumption of some goods and services impose on society. In a lot of ways, these two versions of a tax look almost exactly the same. In terms of the desired effect of the tax on market behavior, however, the two types of taxes are very different.
If a tax is designed to simply collect revenue, the government is very much hoping that that tax won’t change the behavior of producers and consumers very much. For example, it is beneficial in a lot of ways if an income tax on labor doesn’t noticeably lower the incentive for workers to seek jobs or for firms to hire people. The reason is that if a tax doesn’t change buying and selling behavior very much, then it acts mainly as a transfer of money to the government rather than an economic black hole:
“Deadweight loss” is the technical term for the economic black hole, and it’s represented by the black triangle on the graph. Deadweight loss measures the value to society of the transactions that the tax made not happen. Geometrically, we can calculate the size of the deadweight loss triangle by noticing that the base of the triangle is the amount of the (per unit) tax, and the height of the triangle is the change in the market quantity of the item. In the example above, this latter quantity is small and our triangle is not very big. This is a win-win from the government’s perspective, since it gets to collect a lot of revenue and, at the same time, not stifle too much economic activity. But what happens if consumers and producers are more price-sensitive?
Our economic black hole is bigger in this case, and our revenue is smaller. (To see the revenue point, keep in mind that the revenue is just the per-unit tax times the number of units sold, so it’s just the size of the rectangle bounded by the prices and after-tax quantity on the graphs.) Granted, we can debate the merits of transfers from the private sector the government, but a transfer used to provide some sort of social services is better than a “transfer” to an economic black hole, right? (I can hear the jokes about the government being an economic black hole from here, thanks.) Therefore, at least from an efficiency perspective, the government should tax more inelastic (less price-sensitive) markets, since these taxes minimize the amount of loss in economic activity. (There are obviously fairness considerations that often run counter to this logic.)
Now what about this second kind of taxes…you know, sin taxes- the ones meant to correct for externalities or save us from ourselves or whatever. In this case, a tax is put in place as a way to curb socially undesirable behavior. For example, if you cost society $1 in pollution for every gallon of gasoline that you use, then a $1 per gallon tax on gasoline will actually raise economic welfare for society. In other words, whereas a decline in production and consumption was bad in our first example, it’s actually a good thing in this case, at least up to a point. (It would not be efficient to keep taxing gasoline at higher and higher rates until no one drove anymore, for example.) This discussion suggests that, when taxing to curb bad behavior, the government should want people to change their behavior a lot in response to the tax.
We can think about what sorts of taxes likely fall into which category. Income taxes are pretty clearly of the first sort, while taxes on items such as gasoline, alcohol and cigarettes are, at least from a public relations perspective, of the second variety. This brings me to my “Dear Russia: You’re doing it wrong” point…from RedEye:
(For the record, RedEye almost redeems Fox News in my mind…almost.)
If you smoke a pack of cigarettes, that means you are giving more to help solve social problems such as boosting demographics, developing other social services and upholding birth rates. People should understand: Those who drink, those who smoke are doing more to help the state.”
— Alexei Kudrin, Russian finance minister
Hm. I think I finally understand why chants of “U-S-A” start when people are consuming large quantities of beer and cigarettes- clearly those patriotic fellows are just doing their part to help the country that they love. Unfortunately, the world doesn’t really work the way in which Mr. Kudrin thinks it does- yes, the increased revenue from taxes on booze and cigarettes will go to the expansion of social programs, but the social programs getting expanded will likely be of the “health care for people who drank and smoked too much” variety. This is probably not a net benefit to Russian society, and, if it is, it calls into question why the tax on booze and cigarettes was so high in the first place- if you’re taxing more than the amount of the externality, you should probably be honest in that the goal of the tax is to raise revenue more than it is to help society or protect people or whatever. To their credit, at least some Russian officials seem comfortable admitting this, assuming that they are correct in thinking that the revenue will lead to a net increase in social programs. (If they aren’t correct on this point, they are effectively handicapping their own economy.) In the U.S. I have a sneaking suspicion that our politicians are less good on this dimension. At least now you know to be a tad suspicious when a government simultaneously tries to “help” people by enacting a tax and then advertising for that thing that is taxed- state lotteries, anyone?