Sin Tax

What is a 'Sin Tax'

A sin tax is a state-sponsored tax that is added to products or services that are seen as vices, such as alcohol, tobacco and gambling. These types of taxes are levied by governments to discourage individuals from partaking in such activities without making the use of the products illegal. These taxes also provide a source of government revenue.

BREAKING DOWN 'Sin Tax'

Sin taxes are typically added to liquor, cigarettes and other non-luxury items. State governments favor sin taxes because they generate an enormous amount of revenue. The general public usually accepts sin taxes because they are indirect taxes that only affect those who use the products. When individual states run deficits, a sin tax is typically one of the first taxes recommended by lawmakers to help fill the budget gap.

Additional Arguments in Favor of Sin Taxes

A sin tax is a type of Pigovian tax, which is levied on companies that create negative externalities with their business practices. Sin tax proponents maintain that the behaviors being taxed represent negative externalities, as they foist an unfair burden on the rest of society. The harmful effects of alcohol and tobacco increase health care costs, while compulsive gambling often forces families into bankruptcy and financial ruin.

One purpose of a Pigovian tax is to create an incentive to reduce negative externalities. The sin tax accomplishes this purpose, as higher costs through taxation encourage consumers to spend less on harmful products.

Criticism of Sin Taxes

The practice of levying sin taxes draws criticism from both ends of the political spectrum. Small-government conservatives argue that a sin tax represents an overreach of government. These critics allege that by singling out certain products or services for additional taxation, the government is engaging in social engineering and taking on the role of a nanny state.

Similarly, pundits on the left take issue with a sin tax because it tends to create a disproportionate effect on the poor and the uneducated. For example, studies indicate that smoking rates have a strong inverse correlation with educational attainment; those with a high school education or lower are much more likely to partake in tobacco use than those with a bachelor's degree or higher.

Moreover, sin taxes are typically regressive taxes, meaning the less money a person makes, the larger percentage of his income these taxes consume. A pack-a-day smoker who makes $20,000 per year spends the same money on cigarettes – and therefore, the same on cigarette taxes – as one who makes $200,000 per year. However, the taxes eat up a much bigger portion of the low earner's paycheck.

RELATED TERMS
  1. Sin Stock

    A stock of a company that is either involved in or associated ...
  2. Taxes

    An involuntary fee levied on corporations or individuals that ...
  3. Luxury Tax

    A tax placed on products or services that are deemed to be unnecessary ...
  4. Direct Tax

    A tax that is paid directly by an individual or organization ...
  5. Effective Tax Rate

    The average rate at which an individual or corporation is taxed. ...
  6. Tax Rate

    The percentage at which an individual or corporation is taxed. ...
Related Articles
  1. Managing Wealth

    Looking Into Sin Investments

    The stigma that a sin stock receives seems to be more concentrated among individual investors who are certainly entitled to avoid them. The overall market, on the other hand, seems to look favorably ...
  2. Managing Wealth

    Sinful Investing: Is It For You?

    Sin stocks may seen outright undesirable to some, but these "naughty" industries bring stable returns - even in hard times.
  3. Investing

    The Value Of Sin Stocks

    On the whole, these sinful stocks offer little value to society, that doesn't mean they don't have value for investors.
  4. Investing

    The Value Of Sin Stocks

    Typically, “sin stock” refers to the stocks of companies that deal in tobacco, alcohol or other products deemed harmful.
  5. Managing Wealth

    The Evolution Of Sinful Investing

    Like beauty, whether something is sinful often depends whom you ask.
  6. Personal Finance

    The History Of Taxes In The U.S.

    The number of taxes that we now consider a given did not always exist. Find out how they arose.
  7. Trading

    Socially Responsible Investing Vs. Sin Stocks

    Can your principles make you richer or poorer? Find out if it pays pick your portfolio based on ethics.
  8. Trading

    Is Now the Time to Invest in Sin Stocks? (BJK, MO)

    Bullish chart patterns on the charts of these sin stocks and related ETF suggests now is the time to buy.
  9. Personal Finance

    Do Tax Cuts Stimulate The Economy?

    Learn the logic behind the belief that reducing government income benefits everyone.
  10. Personal Finance

    "Temporary" Taxes That Stuck

    Taxpayers should be wary when a new "temporary tax" is introduced. Sometimes these temporary taxes are anything but.
RELATED FAQS
  1. Does Canada have Social Security numbers?

    Learn about the Canadian Social Insurance number, which is used by Canadian residents for identification and tax reporting ... Read Answer >>
  2. What's the difference between regressive and progressive taxes?

    Learn what a regressive tax is in comparison to a progressive tax, and understand the specific types of taxes that are considered ... Read Answer >>
  3. What are the differences between regressive, proportional and progressive taxes?

    Understand the differences between the most common tax systems including regressive taxes, proportional taxes and progressive ... Read Answer >>
  4. In what types of economies are regressive taxes common?

    Understand the three main taxation systems, regressive, proportionate and progressive, and learn where regressive tax systems ... Read Answer >>
  5. What is the difference between a regressive tax and proportional tax?

    Learn about the differences between regressive, progressive and proportional taxes and how they each affect everyday finances ... Read Answer >>
  6. Is progressive tax the same thing as marginal tax rate?

    Learn how a marginal tax rate is a form of a progressive tax rate. Learn the pros and cons of such a tax policy and who may ... Read Answer >>
Hot Definitions
  1. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  2. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  3. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  4. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  5. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  6. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
Trading Center