Consumption and Welfare Effects of Taxes on "Sin"

Abstract

An Indirect Translog System and Linear Expenditure System are applied to Consumer Expenditure Survey data to estimate the effects of “sin taxes” on tobacco, alcohol, and food consumed away from home. Own-price elasticities of demand for tobacco and alcohol are found to be relatively elastic while FAFH is relatively inelastic. This indicates that taxes on FAFH may be an effective means of raising revenue but will have very little effect on consumption. Also, equivalent variations are calculated in order to observe the welfare effects of a 10% tax on each of the commodity groups. For tobacco, alcohol, and FAFH, the equivalent variations indicate a negative short-run effect. The equivalent variations also point toward each tax being regressive as lower incomes face a larger welfare decrease than higher incomes.