Health or Wealth : Is there a trade-off when taxing sin?

Smoking prevalence in the Philippines is among the highest in the world. The economic costs of smoking are substantial, in terms of the huge amounts of resources spent to treat smoking-related diseases, long-term income losses due to premature deaths, and reduced labor productivity. Cigarette taxation is widely believed to be the most effective policy handle to reduce smoking, with the potential benefit of raising tax revenues. This Note looks into the debates surrounding the Sin Tax bill in the Philippines that focus on an important policy question: are there health and revenue trade-offs when taxing sin? With substantial increases in excise taxes on cigarettes, will health gains from reduced smoking come at the expense of reduced tax revenues? Should the government consider smaller increases in excise taxes so that it can gain from both increased tax revenues and reduced cigarette consumption? This Note concludes that trade-offs between health and tax revenue gains exist, but only for relatively large tax rates.It also argues that the ideal tax on cigarettes that yields the highest health gain is a high, uniform, and inflation indexed specific tax.