Taxes which aim to change behaviour

While an ‘efficient’ tax is often considered to be a tax with less impact on behaviour, some taxes are deliberately designed to encourage or discourage certain behaviours desired by the community. ‘Sin taxes’ such as the excise tax on tobacco, are intended to be passed onto consumers (with no accompanying compensation) as pricing signals to discourage consumption of these products. 

In contrast, tax concessions on income paid into superannuation are intended to encourage household savings by providing concessional tax rates for contributions. Similarly, capital allowances for business are intended to encourage capital investment.

Tax concessions may also be targeted to promote particular industries. For example, tax offsets for the Australian film industry allow businesses to offset qualifying Australian production expenditure.

Transfer payments can also be utilised as a mechanism for change. For example, a variety of ‘baby bonuses’ had been implemented in many countries, including in Australia between 2004 and 2014,[47] in an attempt to increase the fertility rate. 

Despite what may be seen as positive impacts when individuals smoke less, reduce carbon emissions, save more for retirement, promote local business prosperity and have more babies, taxes which aim to change behaviour are generally inefficient for the economy. They can also skew equity and add complexity to the overall system.