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256 IRET Congressional Advisory 1 (2009)

handle is hein.taxfoundation/iretcgadv0253 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing the public about policies thait will promote growth and efficient operation of the market economy. June 24, 2009 Advisory No. 256 EXCISE TAXES ILL-SUITED FOR HEALTH CARE FUNDING The Senate Finance Committee has two excise taxes on its list of possible revenue sources for funding a universal health care bill.1 It calls them lifestyle taxes. One would be an increase in the existing alcoholic beverage tax. The other would be a new tax on sugar-sweetened soft drinks. Neither would be good tax policy. They would not raise the expected revenues, and would not necessarily make good sense from a health standpoint. These options are lazy tax policy and the opposite of good government. Congress should exercise more sober judgment and restrict its appetite for playing Carrie Nation and Jenny Craig. obnoxious as Big Brother. The government has conflicting objectives in raising a sin tax. One is to raise revenue; the other is to discourage the harmful activity. One cannot stamp out the sin and collect the sin tax at the same time. If government imposes a high enough tax to stamp out the sin, there will be no revenue. To achieve revenue, the government must keep the Big Sister can be as tax rate low enough to Selective excise taxes distort output, reduce consumer welfare Economists generally prefer a low rate tax applied evenly on a broad base to a high rate tax applied unevenly on a narrow base. The even tax produces less economic distortion and dead weight loss than the uneven tax. Imposition of a tax reduces output of the taxed product or resource. (See Chart 1.) The tax (a smaller tax like t1-t or a larger tax like t2-t2) drives a wedge between the price paid by the consumer and the price received by the supplier. The revenue projection. At higher price discourages consumption, and production is reduced. The tax revenue is the tax rate times the quantity produced and consumed (the tax base). (Shaded rectangles.) Because people demand less of a product when the tax raises its price, quantity shrinks. That shrinkage of the tax base must be factored into the very low rates, a tax may keep the sinners active, or it must find a sin so attractive that the sinners will not quit. Having the government relying on sin for its revenues smacks of something unappetizing. cause a small percentage drop in the base, and the tax clearly raises revenue. The higher the tax rate, the greater is the percentage shrinkage in the base. At very high rates, a tax hike may cause the base to g~em S I 66. 6 ~e Agg Chart 1 Doubling The Tax Rate Quadruples The Deadweight Loss Price The Large Triangle Is The Deadweight Loss The Small Triangle When The Tax Rate Is t2 Is The Deadweight Loss When The Tax Rate Is t, Supply t2 to Demand Q2 Q, Q0 Quantity

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