Sin Taxes and Self Control

"Sin taxes" can be welfare improving if they help people with low self-control reduce their consumption of unhealthy goods. A number of theoretical papers show that this requires consumers with low self-control to respond at least as strongly to a tax as people with high self-control. In this paper, we investigate this relationship in the context of two sets of sin tax reforms in Denmark: first, the increase of the soft drink tax in 2012 and its repeal in 2014, and, second, the fat tax introduction in 2011 and its repeal in 2013. We assess the consumption response empirically using the GfK Consumerscan household panel. With this data, we can separate the sample in consumers with low and high levels of self-control using a survey measure. We find that consumers with low self-control reduce consumption less strongly than consumers with high self-control when taxes go up, but increase consumption to a similar extent when taxes go down. Hence, we document an asymmetry in the responsiveness to increasing and decreasing prices. We show theoretically that these observations are consistent with a model of self-control and rational habit formation. The results suggest that price instruments may not be an effective tool for targeting self-control problems.