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

Author

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  • Tuomas Kosonen
  • Sami Jysmä
  • Riikka Savolainen

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.

Suggested Citation

  • Tuomas Kosonen & Sami Jysmä & Riikka Savolainen, 2024. "Studying a Sin Tax Scheme with Multiple Reforms Lessons for Consumption Taxation," Working Papers 342, Työn ja talouden tutkimus LABORE, The Labour Institute for Economic Research LABORE.
  • Handle: RePEc:pst:wpaper:342
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    References listed on IDEAS

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    1. U. Michael Bergman & Niels Lynggård Hansen, 2019. "Are Excise Taxes on Beverages Fully Passed Through to Prices? The Danish Evidence," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 75(4), pages 323-356.
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    3. Jeffrey Grogger, 2017. "Soda Taxes And The Prices of Sodas And Other Drinks: Evidence From Mexico," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 99(2), pages 481-498.
    4. Kelvin J. Lancaster, 1966. "A New Approach to Consumer Theory," Journal of Political Economy, University of Chicago Press, vol. 74(2), pages 132-132.
    5. Langer, Ashley & Maheshri, Vikram & Winston, Clifford, 2017. "From gallons to miles: A disaggregate analysis of automobile travel and externality taxes," Journal of Public Economics, Elsevier, vol. 152(C), pages 34-46.
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    More about this item

    Keywords

    excise taxes; sin tax; consumption; substitution; sweets; soda;
    All these keywords.

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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