Some time ago I posted on the (Not Quite) Science of Vice Taxes. I argued that social science can inform policy, but the science part of that term is important; if you think a policy is going to have an effect on behavior, then test it first.
If you don’t have time or money to collect the data, run with the status quo. The traditional view in economics is that price matters for consumers, end of story. Economically rational people will pick up a candy bar for $1 but take it back when the receipt says $1.07. Homo economicus doesn’t pay $1.07 for candy bars whether the price is on the sticker or on the receipt.
In a recent interview on NPR, Princeton economist Jacob Goldin explained that this is not the case. The posted price matters because it’s obvious–one study found that demand for groceries went down 8% when tax was included in the sticker price. Even smart people don’t generally calculate their future taxes at the register while they’re throwing items in their shopping cart.
The bottom line for policymakers is clear: If you want people to consume less of something, make the tax more obvious. If you want to just collect more money, make it less obvious.
Consistent with the idea in my earlier post, it appears that policy makers in Conneticut, New York and New Jersey did not have research in mind when they placed sales taxes, not production taxes, on candy and soda-pop.
Colorado doesn’t do much better. In the hopes of funding schools and marijuana trade regulation, Colorado’s strategy should be to collect from a subtler tax. In reality, they employ a mixed strategy: a 15% tax on production and a 10% tax on sales. In theory, people will actually buy less pot in reaction to the higher sticker price. This may be unwise: If you’re running a business fueled by the fires of the sinful, maybe you shouldn’t douse your flames.