November 17, 2010

Ineffective excise tax won’t close the deficit

Richard Williams

Senior Affiliated Scholar
Summary

The deficit reduction plan put forward by Alice Rivlin and Pete Domenici calls for a soda tax, but significant revenue cannot be raised from such a tax.

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The deficit reduction plan put forward by Alice Rivlin and Pete Domenici calls for a soda tax, but significant revenue cannot be raised from such a tax.

The problem is that politicians want to do two things simultaneously that are impossible. They want to discourage what they consider to be unhealthy behavior and they want to raise money. If you are raising money by taxing an ‘unhealthy’ good, it means people are still consuming that good.

In addition to being a poor way to raise money, this type of tax has greater effects on some socioeconomic groups over others.

Unless a good is disproportionally consumed by the rich, an excise tax on any specific commodity will be regressive. Even if they are consumed at the same rate by rich and poor people, the taxes represent a larger share of low-income families’ total income.