The observance of World No Tobacco Day over the weekend underlined global determination to deal with a serious health problem, but attempting to stamp out bad habits by taxing them remains a highly controversial subject.
Governments around the world keep imposing higher and higher taxes on “sin” products such as tobacco and alcohol, but data indicate that the rate of decline in consumption is far behind the rate of increase in the cost of the products.
Discouraging specific behaviours thought to be harmful to the public by making them expensive is also a big money-maker for governments at a time when most are struggling to balance their budgets. Excise taxes are being levied on an expanding list of goods such as alcoholic beverages, tobacco and gambling, and in some countries on candies, soft drinks, fast foods, fatty snacks, and even coffee.
“Sin taxes allow the government to collect revenue while taking the high moral ground. It is naive to assume any other motive,” says Christopher Snowdon, a research fellow at the Institute of Economic Affairs in the United Kingdom and an outspoken critic of the “nanny state”.
“Sin taxes are rarely raised so high as to seriously deter purchase. They are better seen as stealth taxes,” says the author of three books, including Velvet Glove, Iron Fist, a history of anti-smoking movements. He believes governments have no right to tax people on the basis of morality.
Those who favour imposing new excise taxes or increasing existing ones often come up against critics who say that in many cases there is no clear accounting for where the tax revenue goes. Ideally, all the money raised from tobacco taxes, for example, should go to smoking prevention programmes, but in many countries it just goes into the general budget pot.
As well, even when consumption of some “bad” products goes down, people seem to find new and, in many cases cheaper substitutes.
“After we raised the taxes [on tobacco] last year, people switched their consumption behaviour toward the lower-end market,” said Wilai Tantinantana, the deputy director-general of Thailand’s Excise Department. “And as we collect taxes by weight, cigarette companies decrease the amount of tobacco in each pack, causing people to actually smoke more.”
In general, one would expect higher prices to reduce primary demand, but the extent to which this occurs depends on how price-sensitive consumers are. Mr Snowdon concurs that when faced with higher taxes, consumers will choose to downgrade their purchase to cheaper brands of the same product.
“Demand for tobacco and alcohol is quite inelastic,” he told Asia Focus. “This means that people are more likely to cut down on other household expenses before they cut down on the targeted products.”
Research conducted in 2010 by the World Health Organization shows that South Koreans are the world’s biggest drinkers – at least based on per capita consumption which is 9.8 litres of pure alcohol per year. Raising the sin tax in South Korea seems to have had little effect on drinking behaviour, as the famous local drink, Soju, is fairly cheap. Moreover, no strong long-term relationship can be found between higher taxes and lower alcohol consumption in South Korea.
If taxes really did reduce consumption of harmful products, governments would find themselves with less revenue. Yet, the money collected from sin taxes tends to rise every year.
“Last year, the revenue from alcohol and tobacco taxes was very much larger than we anticipated,” says Ms Wilai. “A portion of this revenue is used to fund a number of public programmes and services.”
In Thailand, revenue from sin taxes is estimated at 30 billion baht annually. Among the beneficiaries of tobacco and alcohol taxes is Thai Public Broadcasting Service (Thai PBS), which received 65 million baht or 2.1% of the total. Another 2% is used to fund the Thai Health Promotion Foundation.
“Sin taxes tend to be more popular if people believe that the money raised goes to specific projects such as the health service,” says Mr Snowdon. “In practice, ring-fencing of this sort is very rare. The money nearly always goes toward general government spending.”
In Singapore, revenues from sin taxes are used to subsidise its growing ranks of elderly citizens. Earlier this year, the government introduced a US$7-billion healthcare project to benefit 450,000 seniors. The city-state is also seen as one of Asia’s most determined opponents of tobacco usage; smoking is banned in nearly every public area.
In the Philippines, the government ensures that 15% of the revenues from excise taxes on tobacco products are used for programmes promoting alternatives for tobacco farmers and workers in tobacco-producing provinces. The remaining revenue goes to universal healthcare and medical assistance facilities.
Despite the transparency of its tax system, the Philippines still has one of the highest smoking rates in Asia with 17.3 million smokers and about 87,000 deaths annually due to tobacco-related diseases. However, over the last decade it has toughened its anti-smoking laws, and now legislators are debating more graphic warnings on packages. Cigarette volumes from tobacco manufacturing plants last year declined by 15.5% to 4.9 million packs from 5.8 million in 2012.
In Thailand, health academics point out that despite several increases in tobacco taxes over the past two decades, cigarette sales volumes remain relatively stable, at 2.17 billion packs last year against 2.14 billion in 1992.
In China, the world’s largest producer and consumer of cigarettes with more than 350 million smokers, tobacco taxes are relatively benign. The total cigarette tax rate in China is approximately 40% at the retail price level, far below the median range of 65-70% globally.
In Indonesia, the world’s third-largest consumer of cigarettes, studies have shown that the poorest smokers spend up to 12% of annual household income on cigarettes, is another country with very loose taxation on tobacco. Yet its tax rate, at 46% of the retail price, is also well below the world median. Partly as a result, 36% of the population are smokers, compared with the global average of about 14%.
One unhappy consequence of high taxes, acknowledges Ms Wilai of the Excise Department, is smuggling. Many Thais, she says, are now obtaining cheaper cigarettes from China, Indonesia or Philippines.
“High taxes are the sole driver of the black market for tobacco. There was virtually no illicit trade in cigarettes before governments started to tax them heavily,” added Mr Snowdon.
The scale of smuggling, he says, tends to rise in line with the tax rates since higher prices provide bigger incentives to sell and bigger incentives to buy. Some countries such as the UK or Ireland have the highest tobacco duties and the biggest problem with black-market tobacco. Through the growth of the black market, smuggling business owners gain large profits at the expense of their legal competitors.
In Asia, China sees the largest economic impact from the black market of $261 billion, followed by Japan at $108.3 billion and India at $68.59 billion. Thailand ranks 21st globally with a black market estimated to be worth $13.95 billion.
Mr Snowdon believes that if the objectives of sin taxation are to alter unpleasant behaviours, there are other options available that are much more effective and cost much less.
“In the case of tobacco, educational campaigns and warning labels have been the most effective way of lowering the smoking rate over the last fifty years,” he said.
“In the case of alcohol, it is not consumption per se that is the problem, but harmful consumption. Sensible licensing laws, adequate policing and education about safe drinking can all help reduce the public order and health effects of excessive drinking.”
Some countries also promote healthier food and beverage choices by enforcing labelling that provides nutritional information that people need in order to stay within recommended proportions.
“Another effective way is to control the reach and availability of these items,” Ms Wilai added. “If we make it harder for people to buy alcohol or cigarettes, then consumption will undoubtedly go down.”
Even despite some undesirable consequences or debatable hidden agendas, sin taxation has been proven to decrease the amount of consumption in some countries. Jean-Baptiste Colbert, a 17th century French finance minister, might have put it best: “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.”