Dynamic preferences and the behavioral case against sin taxes

Traditionally, economists and tax theorists justify taxation by means of externalities. In recent years, both scholars and policymakers have begun advocating 'sin taxes' on goods whose consumption causes 'internalities': unaccounted-for costs that a person imposes on herself, not on others. In this paper, we argue that sin taxes rest on a static model of individual choice. They retain neoclassical rationality-with its endorsement of stable and context-independent preferences-as a normative benchmark for good, i.e., welfare-increasing choice. We contrast this model with a more dynamic understanding of choice in which preferences are context-dependent, evolving, and open to individual processes of experimentation. Such a dynamic understanding of choice is backed by recent findings in psychology and behavioral economics and is integral to the political economy of John Stuart Mill. Contributing to the most recent literature in behavioral welfare economics, we argue that the reality of dynamic and evolving preferences animates a contractarian perspective on public policy which, in turn, provides strong arguments against the sin-tax agenda and supports preference-neutral tax rules.

Automated summary

This paper discusses the justification of sin taxes and points out the limitations of their static model, advocating for a more dynamic understanding of choice supported by recent findings in psychology and behavioral economics. It suggests that a dynamic and evolving preference animates a contractarian perspective on public policy, providing strong arguments against sin taxes and supporting preference-neutral tax rules.