Advertise

I present to you two examples from Europe that continue to demonstrate unequivocally that no matter how often fundamental economic principles are violated, the result is the same. A corollary lesson is that Governments will pursue these violations thinking naively that previous errors do not apply to them.

Today's subject: sin tax.

The idea of a sin tax continues to be popular on both sides of the proverbial political aisle.

Even among those that generally accept that taxation deprives the private sector by transferring capital to the less efficient public sector favor the sin tax.  They justify this error by suggesting that people should not be engaged in sinful practices like:  smoking, drinking, gambling, prostitution or the multitude of other offensive actions and raising revenue from these sinful things is acceptable.

Then there are those that are constantly harping on the "common good" and social welfare.  They justify the sin tax on the grounds that regardless of how much revenue is raised, the social benefit conferred from stamping out these activities is a worthwhile effort.  The reasoning is often convoluted and predicated on layers of presumed public spending that this same crowd foisted upon us in the first place.  For example the idea of banning smoking is perfectly reasonable because smokers inflate health care costs and since we are now in one giant health care pool the goal of snuffing out smoking is justifiable and worthwhile.

So while the sin tax is not an overt ban, it is common sense that a large enough tax can become prohibitive enough such as to stamp out usage or at the very least significantly alter social behavior.  The alternate social behavior can cause two predictable reasons:  First, it can spur and activate a robust black market where the taxed goods are now traded through unofficial exchange channels thus depriving the Government of any sales tax revenue.   Second, it can cause, depending on logistical practicalities for the buyers of these goods to seek them from more hospitable areas.  If New York for example over taxes their cigarettes, the beneficiaries may be Rhode Island or New Jersey where the tax is lower.

Both the black market and the purchasing of goods from other locations proves to be a great source of frustration to the authorities implementing the sin tax in the first place.  Not only are they deprived of revenue, but the behavior appears to fly squarely in the face of the regulators and taxers.  Don't people understand that these sin taxes are for our benefit!? If only the stupid sheeple would just do what is good for them then we would not be having this problem.

Tale of two countries.

Several days ago I came across an extremely pleasant and surprising story from Denmark.  Apparently the economic reality of human behavior caught up with Danish regulators and their "fat tax" implemented one year ago is now relegated to the ash heap of history:
The measure, introduced a little over a year ago, was believed to be the world's first so-called "fat tax".
Foods containing more than 2.3% saturated fat - including dairy produce, meat and processed foods - were subject to the surcharge.
But authorities said the tax had inflated food prices and put Danish jobs at risk.
The Danish tax ministry said it was also cancelling its plans to introduce a tax on sugar, the AFP news agency reports.
The ministry said one of the effects of the fat tax was that some Danes had begun crossing the border into Germany to stock up on food there.
According to the Danish National Health and Medicines Authority, 47% of Danes are overweight and 13% are obese.
The tax was introduced in October 2011, in an attempt to limit the population's intake of fatty foods.
The measure added 16 kroner ($2.70; £1.50) per kg (2.2lb) of saturated fats in a product, increasing the price of a 250g pack of butter by 2.20 kroner.
The decision to get rid of the tax was agreed as part of the centre-left minority government's budget negotiations.
Several supermarkets have reportedly said they will reduce their prices once the tax is abolished.
Bold emphasis is mine.  So without even mentioning that attacking saturated fat is foolish, another relic of a concept made popular by Department of Agriculture based on faulty science, the Danes learned a few painful things.

People will continue to do what they want, regardless of how you try to punish them.  You would think that the prohibition of the 1920s would have put the issue to rest.   Worse yet as Danes went to Germany to buy the taxes products the local producers get hit.  This reduces profits and potentially places jobs in jeopardy as the entire production chain begins to contract as demand reduces.

So why is this a tale of two countries?  Are you expecting France to follow suit?  Unfortunately a country that is dominated by Socialists determined to centrally plan not only the economy, but all economic behavior, wilfuly ignore not just history, but examples from their European neighbors.  Introducing the Nutella tax:
PARIS — The French Senate approved Wednesday the so-called Nutella amendment that would quadruple the tax on palm oil, a key ingredient in the chocolate spread, to discourage consumption of the oil rich in saturated fat.
The amendment which would take the tax on palm oil from around 100 euros ($128) now to 400 euros was approved by a vote of 212 to 133 despite protests from major palm producing nations Malaysia and Ivory Coast.
Socialist deputy Yves Daudigny said "palm oil is the most rich in saturated fats and its harmful effect on health has been established."
The "Nutella tax" would affect any foods made with those oils and bring in about €40 million ($51 million).  Whether the French want to regulate consumption of fatty food or raise revenue is unclear, but it is extremely hard to believe that the French believe the saturated fat nonsense.  Considering the French paradox has been a wonderful example of how eating rich fatty dairy products and meats appears to carry no correlation with heart disease.

Chances are the economic ignorant French politicians are figuring that this will not affect French industry as the palm oil is primarily imported and thus they can wash their hands of it.  An additional 40 million euro in a rapidly shrinking French economy is nothing to scoff at, presumably this is viewed as a "free lunch" and they can use the health benefit to justify their actions if need be

Unfortunately what the French are doing are two things.  First, like the Danish demonstrated just a year ago, the French interested in palm oil products will just go to other countries and stock up.  The tax sounds large enough to alter social behavior and so this result is guaranteed.  Secondly, this will hurt local sellers and bakers using these products as their operating margin will shrink.  This will further reduce the tax base and could even translate into job losses and contractions.

We have a beautiful example of how two countries, geographically close enough to each other pursuing entirely opposite strategies despite the demonstrable failures.  A smart man learns his on own mistakes, a genius learns on the mistakes of others and Socialists never learn.
| | Bookmark and Share edit post
"It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.” - M. Rothbard