Taxing the Unvaccinated: Externalities and Paternalism During the Pandemic

Canada has proposed taxing individuals who choose not to take Covid-19 vaccines. Is such a tax justified? In this blog, we discuss the major pros and cons of such taxes.

Taxes on behaviour that is considered undesirable are nothing new. Economic theory provides two main reasons for doing so. The traditional ground follows Pigou’s theory of externalities: costs that are not accounted for in a market transaction. Pigouvian taxes put a price on these costs, such as carbon taxes putting a price on carbon emissions. Greenhouse gas emissions are the externalities that the market does not internalise and, for that reason, are costly for society. 

A second and more controversial reason to tax undesirable behaviours is to target internalities. Building on behavioural economics, these are costs borne by individuals due to their own undesirable behaviour that they are unable to address. This is paternalistic, aimed at protecting people from acting in a way that is irrational. Alcohol taxes are an example; individuals may want to not drink more than a certain amount, but they sometimes still do, which could justify a tax on alcohol. 

It is not always easy to distinguish between these two justifications. For example, alcohol taxes could be justified by externalities (the need to price the additional costs that heavy drinkers put on the society) or internalities (to try to protect consumers from drinking excessively). 

Proposals to tax unvaccinated people could also be based on both justifications. Such taxes could be justified by the additional costs that unvaccinated people put on the health system, or as an incentive for people to contribute the reduction of the spread of covid. But they could also be justified by the need to protect people’s health through encouraging them to get vaccinated. The latter is particularly contentious, though, as some are strongly opposed to vaccination and could view certain vaccination policies as an attack on their bodily integrity. 

A concern is that vaccines might, in exceptional cases, lead to serious harm. But some states do adopt policies that can lead to serious harm in exceptional cases when they consider that the benefits outweigh the costs (for example, Swiss male citizens are required to pay a special tax if they are unfit to serve in the military or civilian service).1 

One might also argue that there is no convincing reason to tax the unvaccinated but not others who adopt other dangerous behaviours. That suggests that there should be a threshold of harm that must be reached for any such taxes to be justified. It seems reasonable to believe that the harms arising from not being vaccinated during a pandemic reach that threshold.

While it is one thing to avoid a tax by not buying cigarettes (a negative act linked to the sale of a product), being obliged to get vaccinated (a positive act linked to someone’s status) to avoid paying a tax may be viewed differently, even if they are similar from an economic perspective. It is thus possible that some opposition to a tax on the unvaccinated might be addressed by designing the measure not as a tax but as a transfer to the vaccinated, for example as a tax benefit.

How targeted should the tax be? The negative impact of not taking the vaccine may depend on whether the externality or internality is being considered, and may depend on an individual’s age, sex, health condition and whether they have been infected previously. However, as with excise duties on alcohol, we support simplicity over a complex design. Hence, there is a case for a simple tax on those who refuse to get vaccinated, irrespective of their characteristics.  

Of course, the main alternatives to taxes are regulations. These include making vaccines mandatory, introducing regulations on what the unvaccinated are allowed to do, and mandating insurance for the unvaccinated. Vaccine mandates are more paternalistic than taxes, but may be justified for children. Regulating what the unvaccinated can do is less paternalistic than mandates, but regulations also face the trade-off between targeting and simplicity, and generally do not raise revenue. 

By contrast, a tax on the unvaccinated may not only change behaviour, but also makes the unvaccinated pay part of the cost they incur on the rest of society. A mandatory insurance system for the unvaccinated provides a third alternative. Mandating insurance against ending up in hospital with Covid-19 for the unvaccinated would provide incentives for vaccine uptake and pay for the cost they impose on the health system. In practice, mandatory insurance is similar to a tax. 

In the end, we believe there is a serious case for considering taxes based on vaccination status, as such taxes are in the end not that different from current taxes on risky behaviour. 

The annual tax is 3% of male citizens’ taxable income, or at least 400 CHF. It has to be paid from the first year of the recruitment (between 19 and 25 years old) until the age of 37.