High tax rates are followed by attempts of ingenious men to beat them as surely as snow is followed by little boys on sleds—Arthur Okun, economist, 1928-1980
A suntanned body is usually taken as a sign of a healthy individual. A sun tan shows an active, outdoors, on-the-go individual. But is the tan really healthy?
In July, 2009, the International Agency for Research on Cancer released a report that categorized tanning beds as “carcinogenic to humans”. The study comes after an analysis of more than 20 epidemiological studies indicating that people who begin using tanning devices before age 30 are 75% more likely to develop melanoma. In response to a growing concern that indoor tanning beds can cause Melanoma, a 10% tax on indoor tanning services was imposed nationally in 2010. The tax was to work like a “sin” tax placed on the consumption of tanning under ultraviolet lights indoors. Economists call this tax a Pigouvian tax used to correct a negative externality.
A negative externality is an example of market failure—a good that is over produced that has spillover effects on people who are neither buyers nor sellers of the good. Some examples are air pollution and loud noises.
The tan tax had unintended consequences. A majority of tanning spa owners reported no decline in business and some businesses would share the tax with clients. As laws are meant to protect, what went wrong with the tax?
Law makers thought that the demand curve for indoor tanning was downward sloping and the supply curve was perfectly elastic so a tax so a 10% tax would reduce the quantity demanded by a large amount which was desirable and all of the cost placed on the consumer, Figure 1.
With no tax, a quantity of 3 billion tanning sessions are demanded and supplied, point 1. If a tax is imposed on the seller to collect from the consumer, the price of tans raise to $1.10 and 2 billion are demanded and supplied, point 2. Tax revenue would b e $200 million and the quantity of tans demand and supplied would be one billion less. Law makers looked at the supply of tans as perfectly elastic in the sense that once the equipment was purchased, spas could supply all of the tans they wanted at no extra marginal cost. Law makers believed the industry was easy to enter as many video stores often gave away tanning sessions with the purchase of a video rental. Given these characteristics, lawmakers grossly overestimated the size of the indoor tanning market.
As Figure 2 shows, an excise tax of $0.10 places some of the burden of the tax on the producer who is not the target of the tax. Figure 2 explains how $0.03 of the tax is placed on the seller while $0.07 is paid the buyer. The Figure also shows just how much the government misjudged the size of the market. Placing a tax of $0.10 on the sale of tanning placed some of the tax where it was unintended.
If a Pigouvian tax doesn’t correct the overproduction of tanning, what are some other ways to internalize the costs of tanning?
Since tanning appears to be socially healthy, require tanning providers to purchase a license like other health care providers. Other alternatives include, rising the age that consumers can tan, increasing the paper work to complete before tanning, limit the number of tanning sessions per month, and increase awareness of melanoma among users.
Opportunity cost involves choices rational consumers make. Many conservatives believe that government intervention in private markets comes at the cost of diminished individual freedoms. Milton Friedman, for example, believed that governments should be dispersed and decentralized. Others, such as Paul A. Samuelson, believe that government intervention in private markets actually makes society freer by creating order and cooperation. Tanning laws would relieve the individual of health costs freeing up both time and money for other productive activities.
Taxing tanners will generate income that can be used to promote the social good. In the end, the tax might be unhealthy for the economy.
 Milton Friedman, Capitalism and Freedom (Chicago: The University of Chicago Press, 1962), p. 2.