An exchange in comments on a recent blog by Jolyon Maugham about the difficulties of structuring a sin tax
reminded me of a posting I made in June 2014 on my local forum, but which is now only visible to registered users. Jolyon’s blog showed the normal regressive pattern for indirect taxes of the two UK taxes most usually considered as being on sin
taking his numbers from an ONS spreadsheet.
As someone who can be quite moralistic about burning fossil fuels, and imagining that richer people might spend more on them in proportion to their income, I wondered whether the pattern would be different. In fact it isn’t – ‘Duty on hydrocarbon oils & Vehicle Excise Duty’ behaves by income quintile much like alcohol duties, but raising about twice as much.
So let’s drop the moralising, and ask what are luxury goods in the sense that
demand increases more than proportionally as income rises, and is a contrast to a “necessity good”, for which demand increases proportionally less than income
That ONS spreadsheet has a detailed breakdown of income by quintiles, but nothing about expenditure, other than forms of expenditure with special taxes, such as alcohol. It would be interesting to see such a cross-sectional study, but my local Forum posting I referred to commented on a longitudinal study for the US
written up in The Atlantic
At the time I wrote
… this chart shows food as a necessity, and entertainment as a luxury – which is what you’d expect. Spending on healthcare as a proportion of income has increased a bit with the explosion of prosperity of the last 100 years, so counts as a luxury on this definition too – but that will be mainly just expenditure in the last few years of life, Overwhelmingly, however, it’s housing which has become the major apparently luxury expenditure item. Partly this will be because much spending on housing really is luxury, as economists understand it – if most of us have a bit more money, we probably will spend it on making our houses nicer. Even so, it feels too much to me, and I suspect reflects the unnecessary expense of housing as people have moved to cities where excessive constraints have been put on the expansion of the housing supply, so pushing up prices.
but in the context of tax policy, if there have to be indirect taxes, only those on property taxes can be significant and progressive.