What is a 'Sin Tax'

A sin tax is levied on specific goods and services at the time of purchase. These items receive the excise tax due to their ability to be harmful or costly to society. Applicable items include tobacco products, alcohol, and gambling ventures. Sin taxes seek to deter people from engaging in socially harmful activities and behaviors, but they also provide a source of revenue for governments.

BREAKING DOWN 'Sin Tax'

Sin taxes are typically added to liquor, cigarettes, and goods that are considered morally hazardous. Because they generate enormous revenue, state governments favor sin taxes. Society accepts sin taxes because they affect only those who use sin taxed products or engage in sin taxed behaviors. When individual states run a deficit, a sin tax is generally one of the first taxes recommended by lawmakers to help fill the budget gap.

A sin tax is a type of Pigovian tax, which is levied on companies which create negative externalities with their business practices. Sin tax proponents maintain that the targeted behaviors and goods produce negative externalities. In other words, they foist an unfair burden on the rest of society. The effects of alcohol and tobacco products increase health care costs driving up the cost of insurance for everyone. Also, compulsive gambling compromises the security and well-being of stable home life, children, and families of the gambler.

One purpose of a Pigovian tax is to create an incentive to reduce negative externalities. The sin tax seeks to reduce or eliminate consumption of harmful products by making them more expensive to obtain.

Criticism of Sin Taxes

Imposing a sin tax does not come without criticism. Small-government conservatives argue that a sin tax represents an overreach of government. Critics allege that by singling out specific 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, there is empirical evidence that the rate of smoking is inversely related to education. Dropouts and high-school graduates have a higher probability,  based on historical usage data, to use tobacco products than those people with advanced degrees.

Moreover, sin taxes are typically regressive taxes, meaning the less money a person makes, the more significant is the percentage of their 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 the lower income consumer must pay represents a more substantial portion of the paycheck.

RELATED TERMS
  1. Regressive Tax

    A regressive tax is a tax that is applied uniformly, resulting ...
  2. Direct Tax

    A direct tax is a tax paid directly by an individual or organization. ...
  3. Luxury Tax

    A luxury tax is an ad valorem tax placed on products or services ...
  4. Taxes

    An involuntary fee levied on corporations or individuals that ...
  5. Excise Tax

    An excise tax is an indirect tax charged by the government on ...
  6. Sales Tax

    A sales tax is a consumption tax imposed by the government on ...
Related Articles
  1. 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.
  2. Financial Advisor

    Add Some Sin To Your Portfolio With This ETF

    There are thousands of ETFs on the market but none dedicated to sin stocks. Here's a look at a few alternatives to consider.
  3. Investing

    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.
  4. Investing

    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.
  5. Investing

    Socially (Ir)responsible Mutual Funds

    Not concerned about being an ethical investor? Maybe "sinful stocks" have a place in your portfolio.
  6. Investing

    Naughty Stocks For A Nice Portfolio

    Can these five sin stocks shield you from the ups and downs of a chaotic market?
  7. Investing

    Sin Stocks: The Natural Choice

    Human nature compels people to undertake risky behavior, and it seems to have created a value opportunity with Vector Group.
  8. Insights

    Industries That Will Never Go Away

    A list of industries that will not perish anytime soon, as they provide and feed our basic needs.
  9. Taxes

    How Tax Cuts Stimulate the Economy

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

    5 States Without Sales Tax

    Learn about the five states that do not charge sales taxes and about other taxes the states levy instead in order to generate revenue.
RELATED FAQS
  1. What is the difference between a state income tax and a federal income tax?

    Learn the difference between state income tax and federal income tax based on tax rates, deductions, tax credits and taxable ... Read Answer >>
Trading Center