Tanning Tax
High
tax rates are followed by
attempts of ingenious men to beat them as surely as snow is followed by little
boys on sleds—Arthur
Okun, economist, 1928-1980
A suntanned body is usually taken as a sign of a healthy
individual. A sun tan shows an active,
outdoors, on-the-go individual. But is
the tan really healthy?
In July, 2009, the International Agency for Research on
Cancer
released
a report that categorized tanning beds as “carcinogenic to humans”. The study
comes after an analysis of more than 20 epidemiological studies indicating that
people who begin using tanning devices before age 30 are 75% more likely to
develop melanoma. In response to a growing concern that indoor
tanning beds can cause Melanoma, a 10% tax on indoor tanning services was
imposed nationally in 2010. The tax was
to work like a “sin” tax placed on the consumption of tanning under ultraviolet
lights indoors. Economists call this tax
a Pigouvian tax used to correct a negative externality.
A negative externality is an example of market failure—a good
that is over produced that has spillover effects on people who are neither
buyers nor sellers of the good. Some
examples are air pollution and loud noises.
The tan tax had unintended consequences. A majority of tanning spa owners reported no
decline in business and some businesses would share the tax with clients. As laws are meant to protect, what went wrong
with the tax?
Law makers thought that the demand curve for indoor tanning
was downward sloping and the supply curve was perfectly elastic so a tax so a
10% tax would reduce the quantity demanded by a large amount which was
desirable and all of the cost placed on the consumer, Figure 1.
With no tax, a quantity of 3 billion tanning sessions are
demanded and supplied, point 1. If a tax
is imposed on the seller to collect from the consumer, the price of tans raise
to $1.10 and 2 billion are demanded and supplied, point 2. Tax revenue would b e $200 million and the
quantity of tans demand and supplied would be one billion less. Law makers looked at the supply of tans as
perfectly elastic in the sense that once the equipment was purchased, spas
could supply all of the tans they wanted at no extra marginal cost. Law makers believed the industry was easy to
enter as many video stores often gave away tanning sessions with the purchase
of a video rental. Given these
characteristics, lawmakers grossly overestimated the size of the indoor tanning
market.
As Figure 2 shows, an excise tax of $0.10 places some of the
burden of the tax on the producer who is not the target of the tax. Figure 2 explains how $0.03 of the tax is
placed on the seller while $0.07 is paid the buyer. The Figure also shows just how much the
government misjudged the size of the market.
Placing a tax of $0.10 on the sale of tanning placed some of the tax
where it was unintended.
If a Pigouvian tax doesn’t correct the overproduction of
tanning, what are some other ways to internalize the costs of tanning?
Since tanning appears to be socially healthy, require
tanning providers to purchase a license like other health care providers. Other alternatives include, rising the age
that consumers can tan, increasing the paper work to complete before tanning,
limit the number of tanning sessions per month, and increase awareness of
melanoma among users.
Opportunity cost involves choices rational consumers
make. Many conservatives believe that
government intervention in private markets comes at the cost of diminished
individual freedoms. Milton Friedman,
for example, believed that governments should be dispersed and decentralized.
Others, such as Paul A. Samuelson, believe
that government intervention in private markets actually makes society freer by
creating order and cooperation. Tanning
laws would relieve the individual of health costs freeing up both time and
money for other productive activities.
Taxing tanners will
generate income that can be used to promote the social good. In the end, the tax might be unhealthy for
the economy.
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