Sin Tax:
A Sin tax is a tax levied on a specific activity or good due to its ability, or perception, to be harmful or costly to individuals or society such as tobacco, alcohol, drugs, gambling and candies, sugary carbonated beverages, etc.
Purpose:
Sin taxes seek to deter people from engaging in socially harmful activities and behaviours. The aim is to reduce or eliminate the consumption of harmful products by making them more expensive to obtain. But they also provide a source of revenue for governments.
Make companies producing these products pay higher tax, which can be used to fund other welfare programmes.
Example: Sweden uses the excess tax collected from gambling to help people with gambling problems
Criticism:
Critics argue that sin taxes can give the state unnecessary moral authority to dictate what citizens should and should not be doing. They are also of the opinion that while sin taxes may reduce purchases of a product for a few years, consumers who are addicted to the habit may persist in buying. Some critics take issue with a sin tax because it tends to create a disproportionate effect on the poor and the uneducated. The poor end up paying a greater share of their income as tax.
Moreover, sin taxes are typically regressive taxes, meaning the less money a person makes, the more significant the percentage of their income these taxes consume.
Let's say, a smoker who makes Rs.20,000 per year spends the same money on cigarettes, and therefore, the same on cigarette taxes, as one who makes Rs.200,000 per year. However, the taxes the lower-income consumer must pay represents a more substantial portion (or percentage) of the paycheck.
Pigouvian Tax:
A Pigouvian tax is a tax placed on any good which creates socially negative externalities. An externality is an activity that creates a negative effect on others in a society but not necessarily the person who does that activity.
A Pigouvian tax equals the costs generated by the negative externality. These costs can be difficult to measure in the real world. It, similar to the sin tax, imposes a harsher burden on the populations with lower incomes compared to those with higher incomes.
Purpose:
One purpose of a Pigouvian tax is to create an incentive to reduce negative externalities.
Example: Pollution, Carbon Taxes ( About 40 countries impose carbon taxes on companies that burn coal, oil, or gas, which produce greenhouse gas emissions)
Drivers of non-compliant vehicles don't suffer immediately from their exhaust, but everyone behind them does. Their exhaust also increases pollution for everyone in the community.
Sin vs Pigouvian :
The key difference is that a Pigouvian tax is primarily levied to minimize negative externalities (harms to others or society as a whole), while a sin tax is levied to reduce negative internalities (harms to oneself).
A cigarette tax can be considered both a sin tax and a Pigouvian tax.
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