Liquor, Tobacco and Sin Goods
Who Really Pays Sin Taxes?
Why sin taxes are regressive in the short run because poorer households spend more of their income on tobacco and alcohol, and why they may be progressive in health terms.
Sin taxes raise an important fairness question.
Regressive in money terms
Poorer households often spend a larger share of their income on tobacco. So a tobacco tax takes a bigger share of poor households’ income: it is regressive.
Price sensitivity
Poorer people and young people are more price-sensitive. When prices rise, they cut consumption more.
Progressive in health terms
- Because the poor cut back more, they gain more health benefits.
- Economists at the World Bank and others argue tobacco taxes can be progressive overall when health gains and avoided medical costs are counted.
Using the revenue
Revenue can fund health programmes, cessation support or cash transfers that offset the burden.
Earmarking
Some countries earmark sin tax revenue for health, like the Philippines’ 2012 sin tax reform, which funded health insurance for the poor.
Tax incidence
Who pays depends on elasticities: if demand is very inelastic, consumers bear most of the tax.
When cigarette taxes rise, a daily-wage smoker cuts from ten to five cigarettes a day, saving money and reducing health risks, while a wealthier smoker barely changes.
They cost the poor more in money but can bring bigger health gains.
- Sin taxes are regressive in money terms.
- Poorer and young people are more price-sensitive.
- Health gains can make tobacco taxes progressive overall.
- The Philippines earmarked sin tax revenue for health.
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