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

TLDR

Sin taxes are often criticized for disproportionately burdening low‑income consumers. The study examines how corrective and redistributive motives interact in optimal taxation and provides formulas for optimal commodity taxes. The optimal sin tax rises with demand elasticity and lower‑income bias or elasticity, falls with consumption concentration among the poor and with income effects, and the authors estimate a nationwide sugar‑sweetened beverage tax using Nielsen Homescan data and a nutrition‑knowledge survey. The results show that a stronger redistributive preference can raise the optimal sin tax when lower‑income consumers are more responsive, and the estimated optimal federal sugar‑sweetened beverage tax is 1–2.1 cents per ounce, with city‑level taxes potentially 60% lower.

Abstract

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 formulas for sufficient statistics 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, using Nielsen Homescan data and a specially designed survey measuring nutrition knowledge and self-control. Holding federal income tax rates constant, our estimates imply an optimal federal sugar-sweetened beverage tax of 1 to 2.1 cents per ounce, although optimal city-level taxes could be as much as 60% lower due to cross-border shopping.