Tax the sin or reward the saint?

Can tax policy build a better society? Governments considering ways to use taxes to shift social behaviour certainly believe it is worth a try.  

The idea of taxes on cigarettes is one that most of the world’s 1.1 billion smokers have come to expect.   

Only one in 100 smokers live in a country with no cigarette tax, and the annual global tax take is now estimated to exceed US$328 billion.  

Alcohol taxes are also common. Almost all countries impose excise on at least one tier of beer, wine or spirits, including Iceland, which tops the world with a tax rate per litre of 100% alcohol nearing 100 per cent. 

Policy makers have seen the effectiveness of smoking and alcohol taxes and are looking at other options to tax the sinner or reward the saint.

In the lucrative business of sin taxes — applying excises or taxes to behaviour governments would like to curb — drinking and smoking remain the staple targets. 

But around the world policy makers who have seen their effectiveness are looking at other options where they could tax the sinner or reward the saint, from sugar, salt and fat to the use of plastics and planes.  

Sin taxes are a relatively new concept, and are related to Pigouvian tax — named for the 1920s economist Arthur Pigou who tried to balance the side effects of positive and negative behaviour by looking at how these might be accounted for in society.  

At the time, when pollution was largely unchecked and the UK was still experimenting with ways to raise revenue, the British economist wrote a seminal work about ‘externalities’ — the impact of different behaviour on society at large.  

Some of those externalities were positive.  

“… Uncompensated services are rendered when resources are invested in private parks in cities; for these, even though the public is not admitted to them, improve the air of the neighbourhood,” Pigou argued.  

“Lamps erected at the doors of private houses … necessarily throw light also on the streets.” 

But the impact of poor social behaviour created costs that required compensation, he wrote, from the factory owner who polluted the air or whose buildings blocked out the light to the mother who needed to work to alleviate poverty but potentially put her children at risk.

Pigou’s reasoning has gone in and out of vogue, but he’s been cited in discussion of policies as diverse as carbon taxes and cap-and-trade pollution credits to Japan’s annual measurement of waistlines to curb national obesity.  

The fine line between effective taxation and damaging an economy

In most countries, taxing negative behaviour has focused on cigarettes and alcohol, says Howard Badger, Partner in the Tax Consulting Group with Australian Baker Tilly firm Pitcher Partners.  

“If you think back to the 80s, you probably remember that in budgets every year they raised the taxes on alcohol and cigarettes for what seemed like forever,” he says.  

“So we’ve got substantial cigarette taxes and alcohol taxes, which I think have probably reached a reasonable stage.

“But you also have a system where there are lower rates on wine and beer and higher rates on some other drinks with higher levels of alcohol.” 

Australia lacks taxes on salt and sugar, although there have been repeated calls from health groups for them to be introduced, but does impose a goods and services tax on processed rather than fresh food.  

“If you think about the GST’s design it is trying to encourage people to do the right thing and eat in a healthy way,” Mr Badger says.  

Australia’s commodity-driven economy makes it disinclined to impose too many taxes on raw materials, he says, and while its cigarette taxes are among the highest in the world there’s little appetite to start imposing other taxes on food.  

“We produce a lot of sugar and sometimes our sugar farmers struggle. We have seen compulsory buying of sugar to make ethanol and there have been various schemes to provide them a form of support. So I think it would be very un-Australian to impose a tax that could hurt those farmers,” he says.  

“The same goes for beef. The way our economy is structured, applying those taxes at the end point would politically be considered a direct attack on Australia’s basic economic pillars.” 

Hard to argue against benefits, easy to get addicted to revenue

The advantage for governments imposing most sin taxes is that they are hard to criticise — and lawmakers can position themselves as acting on public health or social policy while creating a lucrative revenue stream.  

But the approach can become a political minefield if the tax take becomes too broad.  

“The way I look at it is, taxation is something that is fine when someone else is paying it,” says MHA MacIntyre Hudson Tax Partner Nigel May. 

“Within a political sphere, the attraction of sin taxes is that they are a way to raise money which carries low political risk. You can look at it from the viewpoint of tobacco taxes, cannabis taxes, alcohol taxes — they are trying to change behaviours, but also it is a way the government can raise revenue without the political problems that go with general taxation.” 

Once that income stream is in place, however, governments themselves can become addicted.  

“Once you’ve generated for yourself an income stream it is very difficult to cut that income stream off without looking to raise that revenue from another source,” says Mr May — pointing to the example of e-cigarettes or vaping, which are currently taxed only at VAT rates in the UK, but could potentially be taxed more in the future.  

Canada, which has increased restrictions on vaping, is poised to introduce a vape tax in some states this year, and an estimated 10 other countries apply some level of excise.  

“If one took vaping as a case-in-point, governments are generally very good at spending the money that comes in through the tax system,” Mr May says.

“Once you’ve actually started raising reasonable sums of money through a vaping tax, is any government going to say, ‘well no, we’re going to make vaping illegal’.  

“You then have to go back to the general taxpayer and say that we made this illegal, you are going to bear the tax burden that has previously come from that source.” 

As taxes start to take hold, they can spur criminal behaviour as well.  

An estimated US$40 billion is lost annually in cigarette excises to smugglers, according to the WHO, and even emerging sectors like the sale of cannabis in California have seen a thriving black market spring up, valued at four times the legal market. 

“Taxes create economic behaviour, and black market activity is understandable, albeit illegal,” he says.  

“Until we get to a point in which governments are able to act collectively with regards to taxation policy, you’re always going to have the unintended consequences of sin taxes.” 

There is also an argument, Mr May says, about sin taxes ceasing to be progressive over time.  

Smoking is a good example and he points to Australia, where nearly 900,000 smokers have quit after decades of successive price rises.  

Where around half of all Australian adult males and a quarter of adult females smoked in the 1970s, it’s now a small group of about 13 per cent who remain smokers despite facing some of the most expensive cigarette taxes in the world.   

“Smoking is very, very, very low in Australia,” Mr May says.  

“So the people that are still smoking are the ones who are either intractably addicted to it, or perhaps the lowest socio economic group. It’s not really a progressive tax at that point.” 

Keen to be green: Governments tapping the sin tax well

While health has been the motivator behind most sin taxes, improving the environment offers a new scope for lawmakers wanting to shift the social conscience.  

Ireland led the globe with a plastic bag tax in 2002, almost overnight cutting single-use bags by 94 per cent (though bin liner sales skyrocketed in response.) 

In the UK, the first six months of the 5p plastic bag tax saw a remarkable six billion drop out of circulation.  

Ireland is now looking at a so-called latte levy, of 10 to 25 Euro cents a cup, to slash the 22,000 single-use coffee cups sold each hour. The UK Treasury has consulted on a proposal to tax plastic packaging with less than 30 per cent recycled content.  

In France, plans for an eco-tax on airfares are well progressed, applying to all flights out of the country, while fashion manufacturers are beginning to gear up in case they get hit with similar taxes on unsustainable clothes. 

And then there’s meat.  

Contributing 7.1 gigatonnes of emissions to the atmosphere each year, the livestock sector is on the radar of governments looking to curb their carbon, but — so far — there are few specific taxes imposed on the sector for environmental reasons.  

That could change under a German proposal put forward in 2019 by members of the Social Democrats (SPD) and Greens to raise the VAT on beef, not to tackle emissions but to see a reinvestment of funds in the welfare of animals. 

The position is not entirely isolated — a group by the name of the True Animal Protein Price Coalition is lobbying EU governments across the board to apply what it calls a European sustainability charge for meat that would also push up meat taxes. 

The goal of the German proposal would be help farmers restructure, at a time when meat production in Germany is being criticised for its thin margins.   

“On the one hand, some people think it is a good idea with respect to the improving the circumstances in which animals live, and in respect of climate issues, cows in particular are seen as a factor in high emissions,” says Ines Paucksch, a Partner with Baker Tilly Germany. 

“The proposal wasn’t a special tax but a change to the VAT system, because right now the VAT on fresh meat is 7 per cent and the idea would be to increase the VAT rate from the reduced rate to 19 per cent, the standard rate.” 

Germany’s VAT system is already influenced by different lobby groups, Ms Paucksch says, so while most fresh food is at the reduced rate, beverages are often at the higher rate. 

“It’s not always logical how food is treated,” Ms Paucksch says.  

“The idea of the SPD and the Greens is that the increase in tax should work together for the good of the animals and to improve climate, so that farmers would either receive funds to improve the life circumstances of the animals or, if they can, restructure their farming business and potentially reduce the number of cows.” 

The logistics of collecting, allocating and redistributing tax funds would be both complex and potentially impossible under existing law, Ms Paucksch says, underscoring why such a tax remains a distant prospect. 

“You can’t say this special tax receipt will be allocated to reduce the number of cows in Germany — that’s just a theoretical position at the moment,” she says.  

“When you look at the environment, there are other ways the government helps direct the response through tax but it is obviously easier to have a concrete link between tax benefits, for example, and electric cars. 

“Will people buy the meat if it is more expensive? Will they look at buying cheaper meat that might be less efficiently produced? If your plan means that people turn away from less sustainable meat to cheaper meat with industrial farming that is counter-productive.”