Here’s a question for any Doper who is both a proponent of sin taxes and minimum wage laws. How can one support sin taxes as a way to reduce harmful activities while at the same time supporting minimum wage laws without foreseeing reduced employment for low skilled workers? It seems one can’t consistently hold both positions simultaneously.
(1) You are assuming that the elasticity of demand for goods/labor is similar in each case. It may be true that in one case, demand is refractory to changes in price, in the other case it is highly responsive to changes in price. I’m not saying this is necessarily true in the examples you give (I doubt it, in fact) but it’s possible, so in principle the positions may not be inconsistent.
(2) In the case of sin tax, even if demand is completely refractory to higher price (e.g. smokers will continue to smoke whatever the cost), the argument may be that taxation is justified to fund the increased healthcare requirement directly related to consumption.
(3) In the case of minimum wage, it may simply be that advocates do not deny the possibility of consequent lower employment, but simply see this as an acceptable tradeoff.
Very solid post Riemann. Thanks.
The objectives of the two, and their end result, are totally different and unrelated to each other.
The sin tax has the dual purpose of discouraging certain behavior and funding the public cost of mitigating the effects thereof. Neither if which are present in the motivation for minimum wage, which has nothing to do at all with public revenue, and does not discourage any kind of behavior.
The purpose of the minimum wage is not to increase the profits of investors, and its actual or potential benefits should not be judged by how well that outcome is realized. Its purpose is to bring marginal working Americans above the poverty level. Sadly, though, many Americans and their elected officeholders believe it is the former and evaluate its merit only according to the well-being of the corporate and entrepreneurial entities.
The only connection is that they both center around money – but what doesn’t?
I do foresee it as a possibility. I don’t think it’s necessarily a bad thing, as long as we have adequate safety nets to make sure the unemployed are properly cared for, and have the opportunity to train for better jobs.
As you say the purpose of the minimum wage is to improve the lot of low skill workers. However as the OP points out since people respond to prices being increased by purchasing less, a minimum wage necessarily means more unemployed low skilled workers it actually harms those it is supposed to help.
Yes, I think it’s a weak position to suppose that a higher minimum wage will not lead to at least some decrease in employment in the short term. In principle that’s an empirical quantitative question, although you’ll probably get 5 different answers from 5 economists. But if we have an adequate social safety net for the unemployed, this may be an acceptable trade-off. And if the social safety net is funded out of general progressive taxation, then higher earners are paying for most of it, so it’s a net transfer of wealth to low-earners overall, even if a few of them lose their jobs.
The counterargument will generally be that increasing wage costs for business slows economic expansion, thus decreasing the overall size of the pie.
Nor would virtually any economist claim that it was preferable to create unemployment then subsidize the unemployed rather than just subsidize the employed, ie bring net wages above market by progressive tax/redistribution to low wage workers, rather than by mandating a wage above the market clearing level.
Subject also to whether the minimum wage is distinctly above the market clearing level for a significant number of jobs. That’s murky for marginal increases in minimum wage from $7.25; the US national min wage had in the past been as high as ~10 in today's 's (though usually no higher than ~$8), and for local increases it depends on local conditions. Empirical studies have tended to focus on cases where the min wage wasn’t much of a effect v market, because those are the common cases, but murky or ostensibly counter intuitive results of such studies aren’t very profound. If OTOH one raised the national min wage in the US to $15, there would probably be clearly noticeable negative side effects.
But many voters think the cost of mandating wages well above the market clearing level just disappears somehow, and/or is just paid by people who ‘deserve’ to have less than they do. That makes it hard to propose paying out public money, and more of it, to achieve the more efficient solution of letting the market set wages and just forcing higher income people to subsidize lower income people via the tax code and explicit expenditure (or the semi-explicit expenditure of refundable tax credits).
Also, though there’s some redistribution effect from wealthy to poor of a significantly higher than market (again say $15 national) min wage, a lot of that redistribution is actually from people not that far up the economic scale from min wage: they spend more of their money on the products/services of min wage labor which will become more expensive. The idea that instead return on capital of businesses employing such labor would just permanently drop, the common implicit political assumption, is pretty dubious. The average ‘span’ between payer and recipient would probably be wider with greater wage subsidies rather than a higher min wage.
Anyway I agree with the general response to OP that in case of either ‘sin taxes’ or min wage, a reasonable view would accept that they hurt some people, as most interventionist policies do. But politics is typically constrained to try to argue that proposed policies will help everyone, or all but a ‘tiny’ (and undeserving) few.
Not exactly. It helps every low wage worker who keeps his/her job. It hurts those low wage workers who lose their jobs. There’s not one “them” universally harmed. There are two them’s: one helped and one hurt.
And sweeping that distinction under the rug is the usual facile argument against MW laws.
A similar issue applies to free trade. Most entrepreneurs argue free trade is a “good”. Funny they argue minimum wage is a “bad”. Not a “net bad”, just a “bad.”
Probably has more to do with which side their individual bread is buttered on than anything to do with societal-level net gains or losses.
I did more reading, and as it turns out, higher minimum wage can increase employment. According to one study:
Can you show that increasing minimum wages significant increases unemployment?
Sin taxes work on many levels.
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True.
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Not such a good comparison IMO. Classical economics would say a minimum wage is a net negative, to overall output, after netting out the gains and losses. It would say free trade is a net positive, though also with gains and losses. Non-standard economics might try to argue against either of those conclusions, without much ultimate chance of success IMO…but anyway it’s not the best comparison because of while those two have winners and losers, so does almost every other policy. But others pair of policies might be on the same side net and thus a closer comparison.
Also free trade, despite lots of populist obfuscation now on right as well as left, is basically a lack of public intrusion dictating the terms of private economic activity. A minimum wage is also on the other side of that.
This isn’t meant to ‘prove’ any particular minimum wage policy or none is the right one in the real political world. But it’s not really entirely a matter of which side your bread is buttered on. A minimum wage significantly above the market clearing wage can be expected to have a net cost in overall output $'s and cents terms, though can be plausibly be defended as least worst and feasible policy to address, more like slightly palliate realistically speaking, concern about income inequality. Again besides the most extreme populist position (that free trade has been ‘imposed’ by shadowy forces who know it’s a net negative) it’s hard to imagine how anyone could defend free trade if it was a known net negative for total economic output.
Good catch. I was struggling to identify another example of politically-driven certainty about rather fuzzy economic tradeoffs having distinct populations of winners and losers. For all the reasons you outline I didn’t come up with a real good example.
Even if increased MW laws made the total polity worse off they could still potentially have a net positive effect at the bottom.
Simply by putting more spending money in the hands of people who spend every dime they earn. Even if that harms the well-off who spend much less than whatever they earn/receive in wages and investment income.
I am not familiar enough with the prospective theorizing and the retrospective data to know what the tradeoffs really are.
I’m against sin taxes for a couple of reasons.
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I believe that taxes should be just enough to run the government body levying the tax. Taxes should not be used for social engineering.
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If a sin tax did ‘work’ in stopping some sort of behavior, government would be use to spending that money. Therefore they would come up with more ‘sins’. There’s already talk of taxing fatty foods. Speed traps are a great example of taking money from individuals to support government.
What does “just enough to run the government body” mean? Do you want to have a government that taxes people solely to raise enough money to pay the salaries of the people in government? Then why have a government at all?
The government taxes us in order to provide government services to the population. The cost of running the government is an overhead in providing those services. The discussion you want to have, presumably, is how extensive government services should be, and your view is “minimal”.
You don’t believe in what you call “social engineering” or in government services funded by taxation. So, what do you propose should happen if a poor smoker, who has had access to dirt cheap cigarettes as one of his few pleasures in life, gets a treatable cancer attributable to smoking? Should we just let him die if he has made unhealthy choices and has no money?
I believe Riemann nailed it.
I disagree with JerrySTL’s specific conclusions, but he raises a larger point about funding government. There are broadly two approaches:
- Government can decide arbitrarily to tax everyone at, say, 15%, and then spend whatever they happen to collect.
Or - They can decide they need to spend $X, then arrange tax types and levels to achieve $X worth of revenue.
A sin tax is an example of the former: decide a rate based on whatever non-budgetary criteria, then accept (and spend) whatever volume of revenue it happens to create. If the government is lucky the revenue will be a massive windfall. If not, not.
With the worrisome result that gov’t can become addicted to the excess revenue. Once the sin tax does its job and the sin is abated they need to invent a new sin to tax because they can’t live without the revenue.
Sin taxes are generally popular with taxpayers because most of us know of sins we don’t partake of. So taxing those is a vote winner.
Jerry’s objection is to type 1) taxes.
All in all it’s a slippery slope argument and subject to all the limitations they have. Which is why I don’t buy it. Humanity in bulk is stupid and a little nudging in the right way can make almost all of us happier. I’d rather live amongst people nudged to be a bit smarter and a bit more forward thinking.
I don’t see this distinction at all. Why can’t a government proceed on the basis of (2), and have sin taxes as just one part of it’s revenue stream? And I don’t see why a government should get “addicted” to sin taxes any more than another form of taxation? Sure, if one source of revenue drops, then they have to make it up somewhere else, but that’s true of any source of revenue.
In any event, one argument for sin taxes is the increased healthcare costs associated with the “sin”. If revenue falls because (say) less people are smoking, then healthcare costs will fall. So the argument for the sin tax is not to discourage people from consumption by imposing an artificial price so much as to insist that they pay the true overall expected cost for their chosen vice.
In theory of their most reasonable proponents, ‘sin tax’ is a misnomer. The best argument for them is that offset actual public costs which are external to the transactions they tax, ie the sale of cigarettes doesn’t naturally cover the extra public health costs of smoking. So it should only be coincidental if the things specially taxed are traditionally viewed as ‘vices’ in any moral sense. A carbon tax to offset the externalities of CO2 production would be the same concept, aiming to price the external effect, not make a moral judgment (postmodern type people might view fossil energy use as a sin against Gaia, but it’s not traditionally viewed that way 
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But there are some problems with that in real cases IMO. For example heavy taxation of gambling is relatively hard to tie to any quantifiable externality. Gambling addiction can be destructive, but it’s a real stretch to say local/state entities setting up legal gambling areas in the first place are then taxing it to control gambling addiction. They are doing both things because it’s a political path of least resistance to raise money.
And there is a perverse incentive when govt’s come to rely on revenue for activities they say they are trying to reduce by special taxes. Especially since the tax collection and externality cost might be at different levels of govt, or inside v. outside govt. For example cigarette taxes are generally collected by states, but a lot of health care costs are paid for by either the federal govt or private entities, plus you have to correct for the shorter life of smokers reducing some other public costs, and those gains again are spread out beyond the cigarette taxing entity. As a practical matter it’s often quite obvious states raise cigarette taxes to cover general budget gaps, not because they discovered the net cost to society of smoking was higher than they previously thought.
And there’s a slippery slope problem potentially to trying to micro manage behavior more and more with targeted taxes. Let’s put it this way, I oppose targeted tax incentives (either higher taxes or breaks/credits for particularly activities or their avoidance) in general on the federal level in the US. Something like carbon might be an exception, charitable giving would definitely be another (because it tends to guard against the govt squeezing out the rest of civil society as big govt has a tendency to do). If that could be fixed, I wouldn’t have a huge problem with a few local targeted taxes.
Isn’t the public education system social engineering? Isn’t the criminal justice system social engineering? Supported by taxes.