Taxing for Health in Latin America

Leandro Arozamena, Hernán Ruffo, Pablo Sanguinetti and Federico Weinschelbaum

No 4708, Asociación Argentina de Economía Política: Working Papers from Asociación Argentina de Economía Política

Abstract: We present a model that provides insights into the optimal structure of sin taxes, considering the varying health risks of different product variants and the presence of internalities and externalities. Then, we compare its predictions with the tax policies on tobacco, alcoholic beverages, and sugar-sweetened drinks in Latin America and the Caribbean. Our framework confirms the intuition that taxes should be levied based on the health risks these products impose on individuals. Nevertheless, we show evidence from Latin America demonstrating that sin taxes on these products are often not established in proportion to the harm they produce. Our model also suggests that consumption response to taxes is weaker when there is a higher subjective misperception of the health risk, necessitating further tax increases. A key policy issue that relates to the theoretical framework is the potential trade-off between health and revenue objectives that the government may face. Authorities may be worried that increasing these taxes for health purposes may reduce tax revenue if the demand falls to a greater extent than the taxes increase. Our model shows that the revenue argument for taxing sin products may imply higher taxes for all variants (though relatively lower for less harmful versions).

JEL-codes: D6 H2 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2024-11
New Economics Papers: this item is included in nep-hea, nep-lam and nep-pbe
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Related works:
Working Paper: Taxing for Health in Latin America (2024)
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