Dynamic Preferences and the Behavioral Case Against Sin Taxes
Constitutional Political Economy (Forthcoming)
27 Pages Posted: 11 Jul 2020 Last revised: 3 Mar 2021
Date Written: June 1, 2020
Traditionally, economists and tax theorists justify taxation by means of externalities. In recent years, both scholars and policymakers have begun advocating ‘sin taxes’ on goods whose consumption causes ‘internalities’: unaccounted-for costs that a person imposes on herself, not on others. In this paper, we argue that sin taxes rest on a static model of individual choice. They retain neoclassical rationality — with its endorsement of stable and context-independent preferences — as a normative benchmark for good, i.e., welfare-increasing choice. We contrast this model with a more dynamic understanding of choice in which preferences are context-dependent, evolving, and open to individual processes of experimentation. Such a dynamic understanding of choice is backed by recent findings in psychology and behavioral economics and is integral to the political economy of John Stuart Mill. Contributing to the most recent literature in behavioral welfare economics, we argue that the reality of dynamic and evolving preferences animates a contractarian perspective on public policy which, in turn, provides strong arguments against the sin-tax agenda and supports preference-neutral tax rules.
Keywords: Sin taxes, Behavioral Economics, Contractarianism, Dynamic Preferences, John Stuart Mill, Self-Governance
JEL Classification: D63, D91, H20, I31
Suggested Citation: Suggested Citation