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A common objection to “sin taxes”—corrective taxes on goods that are thought to be overconsumed, such as cigarettes, alcohol, and sugary drinks—is that they often fall disproportionately on low-income consumers. This paper studies the interaction between corrective and redistributive motives in a general optimal taxation framework and delivers empirically implementable formulas for sufficient statistics for the optimal commodity tax. The optimal sin tax is increasing in the price elasticity of demand, increasing in the degree to which lower-income consumers are more biased or more elastic to the tax, decreasing in the extent to which consumption is concentrated among the poor, and decreasing in income effects, because income effects imply that commodity taxes create labor supply distortions. Contrary to common intuitions, stronger preferences for redistribution can increase the optimal sin tax, if lower-income consumers are more responsive to taxes or are more biased. As an application, we estimate the optimal nationwide tax on sugar-sweetened beverages, using Nielsen Homescan data and a specially designed survey measuring nutrition knowledge and self-control. Holding federal income tax rates constant, our estimates imply an optimal federal sugar-sweetened beverage tax of 1 to 2.1 cents per ounce, although optimal city-level taxes could be as much as 60% lower due to cross-border shopping.

Consumers nominally pay the consumption tax, but theoretical and empirical evidence is mixed on whether corporations partly shoulder this burden, thereby affecting corporate investment. Using a quasi-natural experiment, we show that consumption taxes decrease investment. Firms facing more elastic demand decrease investment more strongly, because they bear more of the consumption tax. We corroborate the validity of our findings using 86 consumption tax changes in a cross-country panel. We document two mechanisms underlying the investment response: reduced firms’ profitability and lower aggregate consumption. Importantly, the magnitude of the investment response to consumption taxes is similar to that of corporate taxes.

Using two strategies, we show that consumers underreact to taxes that are not salient. First, using a field experiment in a grocery store, we find that posting tax-inclusive price tags reduces demand by 8 percent. Second, increases in taxes included in posted prices reduce alcohol consumption more than increases in taxes applied at the register. We develop a theoretical framework for applied welfare analysis that accommodates salience effects and other optimization failures. The simple formulas we derive imply that the economic incidence of a tax depends on its statutory incidence, and that even policies that induce no change in behavior can create efficiency losses.

We measure how pass-through varies with competition in isolated oligopolistic markets with captive consumers. Using daily pricing data from gas stations on small Greek islands, we study how unanticipated and exogenous changes in excise duties are passed through to consumers in markets with different numbers of retailers. We find that pass-through increases from 0.4 in monopoly markets to 1 in markets with four or more competitors and remains constant thereafter. The speed of price adjustment is about 60 percent higher in more competitive markets. Finally, we show that geographic market definitions based on measures of distance across sellers often result in significant overestimation of the pass-through.

Recent research shows prices are insensitive to local demand conditions because national chains charge geographically uniform prices. We examine the price response to local cost shocks, including 68 excise tax changes, 76 sales tax changes, and other geographically based cost differences, using data on 35,151 retail stores in 96 multi-state chains. We find local cost shocks are passed through to local prices, with no spillovers to unaffected stores in otherwise affected chains, and at similar rates for national and local chains. Firms adjust local prices according to local cost changes, suggesting retailers respond asymmetrically to local cost and demand shocks.

The prevalence of strong brands such as Coca-Cola, McDonald's, Budweiser, and Marlboro in \"vice\" categories has important implications for regulators and consumers. While researchers in multiple disciplines have studied the effectiveness of antitobacco countermarketing strategies, little attention has been given to how brand strength may moderate the efficacy of tactics such as excise taxes, usage restrictions, and educational advertising campaigns. In this research, the authors use a multiple discrete-continuous model to study the impact of antismoking techniques on smokers' choices of brands and quantities. The results suggest that although cigarette excise taxes decrease smoking rates, these taxes also result in a shift in market share toward stronger brands. Market leaders may be less affected by tax policies because their market power allows strong brands such as Marlboro to absorb rather than pass through increased taxes. In contrast, smoke-free restrictions cause a shift away from stronger brands. In terms of antismoking advertising, the authors find minimal effects on brand choice and consumption. The findings highlight the importance of considering brand asymmetries when designing a policy portfolio on cigarette tax hikes, smoke-free restrictions, and antismoking advertising campaigns.

A censored Exact Affine Stone Index incomplete demand system is estimated for 23 packaged foods and beverages and a numéraire good. Instrumental variables are used to control for endogenous prices. A half-cent per ounce increase in sugar-sweetened beverage prices is predicted to reduce total calories from the 23 foods and beverages but increase sodium and fat intakes as a result of product substitution. The predicted decline in calories is larger for low-income households than for high-income house-holds, although welfare loss is also higher for low-income households. Neglecting price endogeneity or estimating a conditional demand model significantly overestimates the calorie reduction.

We conducted an experiment to study the fiscal impacts of unhealthy food taxes and healthy food subsidies on very low and medium income women in France. The policies tend to be regressive and favour higher income consumers. Unhealthy food taxes increase prices paid more for lower than higher income women. Healthy food subsidies reduce the prices paid more for higher than lower income women. The effects arise because the pre-policy diets of the higher income women tend to be healthier but also because the choices of the higher income women are more responsive to price changes.

This paper uses UPC-level data to examine the relationship between excise taxes, retail prices, and consumer welfare in the distilled spirits market. We document a nominal rigidity in retail prices that arises because firms largely choose prices that end in 99 cents and change prices in whole-dollar increments. A correctly specified model, like an ordered logit, takes this discreteness into account when predicting the effects of alternative taxes. Explicitly accounting for price points substantially impacts estimates of tax incidence and the excess burden cost of tax revenue. Meaningful nonmonotonicities in these quantities expand the potential considerations in setting excise taxes.

State governments levy special taxes on many products and services to generate public revenue, but until recently, none have assessed, or even considered, an ad valorem excise tax on the sale of firearms. And while some research has examined the potential revenue effects of raising the firearms tax at the federal level, no economic analysis has investigated the possible state revenues that could be generated by taxes on guns. The present note addresses this gap in the literature. We derive a revenue-maximizing excise tax rate on guns for each state and calculate that it would increase tax revenues by approximately $1.3 billion annually across all states. Recognizing that the revenue-maximizing rate may be politically infeasible, however, we also estimate the potential state revenue from taxing firearms at rates similar to those assessed on other goods. The majority of states would benefit most by taxing guns at rates comparable to those on cigarettes, though some states would gain more by taxing firearms at the rates they currently levy on gasoline, sports betting, vaping, cannabis, or lodging. JEL codes: H71, L64.