University of Wisconsin assistant professor in economics Martin O’Connell is investigating the theoretical effects of a sin tax, which are placed on products that have external costs — such as sugars, nicotine and alcohol. The idea behind implementing these taxes is decrease consumer consumption of unhealthy products, like soda, according to O’Connell’s research.
“[There is] lots of evidence that those products are bad, particularly if consumed in excess, so there is a public policy rationale to affect decisions,” O’Connell said.
O’Connell works closely with behavioral and public economics. He analyzes the consumer’s preferences and outlines policies, such as taxes or subsidies, that can alter behavior.
Most taxes that are implemented are not meant to alter behaviors, but this is where the sin tax serves a unique purpose. The idea behind a tax on goods that have external costs or externalities, is that the public will consume them less. The consumer may not be taking into account the externalities of their consumption, so the tax makes the cost much less abstract, O’Connell said.
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These kinds of taxes are not a novel idea — the U.S. has implemented taxes on tobacco products in the past due to the well-known links to cancer. A 25-cent tax on tobacco products was associated with a 1.5% decrease in consumption for ages 18-24, according to a 2018 study led by researchers from the University of Pittsburgh.
Taxes like the sin tax, though, tend to target products that are primarily consumed by those in lower socioeconomic classes, according to O’Connell.
O’Connell said to make these taxes effective in changing behavior there would need to be a balancing mechanism such as a subsidy, which is the opposite of a tax and would incentivize companies to limit the production, sale or marketing of harmful products for the public good.
A large point of contention surrounding tax implementation is how tax revenue will be used. But, these conversations are outside the scope of research in the social sciences, according to O’Connell.
Social science research, such as social psychology or economics, is very different from the research that is conducted in medical fields. The difference lies in how the researchers conduct the experiments, O’Connell said.
Medical fields may conduct experiments in a lab and analyze data in experimental conditions, but in social sciences, there are rarely opportunities to observe consumer behavior in vacuums with the necessary controls. So researchers turn to conducting research in real-world settings. The benefit of this is that, unlike medical research, this research is easily applicable to the real world, according to O’Connell.
O’Connell’s research mainly revolves around energy-related taxes, which also observes providing subsidies to reusable energy sources. His latest research investigates the benefits of subsidies because the prices of gas and electricity have skyrocketed since the start of the conflict between Ukraine and Russia.
