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Taxes and bans

It's been a few months since I stopped consuming the news (except for few things on tech and startups). So, once in a while, I read a book that is arguably the equivalent of everything noteworthy that has been in the news over several weeks or months. My last such book was Shashi Tharoor's 'The Paradoxical Prime Minister' which was an account of the five years spanning Modi's first term. And this past weekend, I started reading Chetan Bhagat's essays grouped under 'India positive'.

One of the things that stood out was the various bans introduced by the government as well as the raised taxes on items / activities like alcohol, cigarettes and gambling.

When the government wants to discourage a certain kind of act in the society, it has two options. One, it can outright ban the activity (or the sale of a product) like it did when it banned liquor shops within five hundred metres of state highways. Two, it can raise taxes on the said item or activity while allowing consumption of it to be legal, thus raising prices for it.

Bringing about change involves convincing people to make that change. Thus, when a ban is introduced, nothing is really done to change the mindset of the people or of the society. It simply results in illegal trade of that commodity / activity, with the government incurring additional expenses in trying to enforce the ban. This does little to actually bring about any change. Piracy and marijuana are good examples of this.

However, if something is legal and heavily taxed combined with widespread education on the ill effects, then that simply puts these items and activities out of reach for most people. When most people can't afford something, it begins to not be popular to consume, thus reducing peer pressure and social status pressure to do so.

Eventually, once the culture shifts enough, people will voluntarily choose not to do it. This is what has happened to cigarette smoking which is progressively lower (and less cool) in younger generations.

Taxes and bans work very differently and understanding the nuances helps decide which tactic to employ.

Are we setting out to change the culture or are we setting out to impose a restriction?

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