Saving America from Itself: Taxing Sin

Abstract

Far too many people in United States suffer from a variety of preventable health problems. Individuals are making choices that result in a host of negative outcomes. Some negative outcomes can be categorized as externalities, but a larger portion is more correctly categorized as internalities. Despite a growing amount of attention, internalities have not historically been the focus of extensive research. The severity of the internality problem, however, leaves the United States in need of a solution. My objective in this paper is to demonstrate that sin taxes can be used as an effective public policy mechanism for correcting internalities. To do this I will first show that the two alternative approaches used in the past have been unsuccessful. I will go on to narrate the limited use of sin taxes at the federal and state level, and then examine the United States' application of this tax in a world perspective. My subsequent objective will be to provide an explanation for the unusually low level of sin taxes in the United States. Finally, I will make the case for taxing sin by describing how an internality is a form of market failure. I will then demonstrate how taxation is able to correct this failure, and chronicle the precedential effectiveness of sin taxes at correcting internalities and generating government revenue. In order to further substantiate the advantages of this policy, I will address the main concerns surrounding sin taxes and show why they are ill-founded.