Studying a Sin Tax Scheme with Multiple Reforms - Lessons for Consumption Taxation

Tuomas Kosonen, Sami Jysmä and Riikka Savolainen

No 164, Working Papers from VATT Institute for Economic Research

Abstract: This paper studies the relationship between substitutability of taxed and nontaxed goods and the price elasticity of demand. We organize the paper through a simple model that yields as a result a highly convex relationship between the demand elasticity and how close non-taxed substitutes are available. Empirically we analyze a Finnish sin tax scheme for sweets, soda and ice cream providing us with quasi-experimental variation through multiple reforms. We have product and storelevel data on sales and prices containing hundreds of millions of observations. We also develop survey evidence on substitution preferences across categories of goods. Our estimated consumption elasticity is close to zero for sweets and ice cream that have intermediate non-taxed substitute: cookies. In a stark contrast, when the tax rate was doubled for sugary soft drinks but not for their close substitute non-sugary soft drinks, consumption elasticity is close to unity. These estimates align well with our theory framework wherein even with intermediate non-taxed substitutes available the demand elasticity is close to zero, while it is close to unity when very close substitutes are available. We also provide evidence that the quasiexperimental price elasticity estimates in the previous literature align with our theory framework.

Keywords: excise taxes; sin tax; consumption; substitution; sweets; soda; Social security; taxation and inequality; H2; I18; fi=Verotus|sv=Beskattning|en=Taxation| (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-hea and nep-pbe
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