Free US Law Dictionary

Sin Tax

A Pigovian tax (also spelled Pigouvian tax) is a tax levied to correct the negative externalities of a market activity. For instance, a Pigovian tax may be levied on producers who pollute the environment to encourage them to reduce pollution, and to provide revenue which may be used to counteract the negative effects of the pollution. Certain types of Pigovian taxes are sometimes referred to as sin taxes, for example taxes on alcohol and cigarettes.

Sin taxes are often enacted for special projects — American cities and counties have used them to pay for stadiums — when increasing income or property taxes would be politically inviable. The proper name for such taxes is sumptuary tax.

Pigovian taxes are named after economist Arthur Pigou (1877-1959) who also developed the concept of economic externalities. William Baumol was instrumental in framing Pigou's work in modern economics.[1]