Government Should Not Impose Sin Taxes

February 22, 2006

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WASHINGTON In a study released today by the Cato Institute, “Against the New Paternalism: Internalities and the Economics of Self-Control”, Glen Whitman, an associate professor of economics at California State University, Northridge, shows that an increasingly prevalent argument for the paternalistic regulation of individual choice — an argument used to justify cigarette and fat taxes — is flawed.

Economists have long contended that government intervention makes most sense in situations in which the costs or benefits of an activity spill over onto people not involved in the activity (e.g. people who breathe polluted air or neighbors disturbed by loud music). These spillovers are called externalities.

A growing literature in economics, as well as the popular press, now maintains that the same argument used to justify the regulation of activities that adversely affect others can be applied to justify the regulation of activities that will affect only one’s own future self. The fact that the present self who wishes to eat a second slice of cake may impose a kind of negative externality on the future self who wishes to be thin is alleged to provide a rationale for government action to protect us from ourselves. These within-person externalities have been dubbed internalities. The internalities approach provides a novel argument in favor of paternalistic government policies such as sin taxes (including fat taxes), marketing restrictions, and mandatory savings plans.

Whitman argues that theorists of “internalities” are working within a defunct intellectual framework. Ingenuously applying Nobel laureate Ronald Coase’s seminal work on externalities, Whitman shows why governments will be unable to set effective paternalistic policy based on the idea of internalities.

Preventing harm to the future self might involve even greater harm to the present self, Whitman writes. There’s no valid reason to assume, when there is an inconsistency between present and future interests, that the latter must trump the former.

Any one-size-fits all policy will necessarily be efficient for only a fraction of the public at best. Individuals have every reason to understand their own needs and find suitable means of solving their own problems, concludes Whitman.

Policy Analysis Paper no. 563