The consumption taxes that keep people poor

The poorest twenty per cent of households in Britain spend an average of £1,286 per year on ‘sin taxes’, including betting taxes, vehicle excise duty, air passenger duty, ‘green taxes’ and duty on tobacco, alcohol and motor fuels. In addition, they also spend £1,165 on VAT. This does not include the cost of the products themselves, only the tax. These are very significant sums of money to people working on the minimum wage. For those in the bottom income quintile, the £1,286 spent on ‘sin taxes’ amounts to 11.4 per cent of their disposable household income. For every eight pounds the poorest people in Britain spend, one pound is taken from them in sin taxes. Even the church at the height of its powers only expected a tithe of one pound in ten from its penitent sinners.

If we look at individuals, rather than the poor as a group, the figures are still more stark. Even a conservative estimate shows that the average low income smoker, motorist and drinker spends 12.6 per cent, 8.2 per cent and 2.5 per cent of their income on sin taxes related to tobacco, motor fuel and alcohol respectively. Again, this does not include the cost of the product itself, nor the VAT on the product (although it includes the VAT on the duty). Of course, not all poor people drink, smoke and drive. Indeed, it is difficult to imagine many people on low incomes being able to afford to be smokers, drinkers and motorists, but very large numbers engage in at least one of these activities and they are heavily penalised by Britain’s sin tax regime.

The iniquitous impact of consumption taxes on low income groups is met with a surprising degree of indifference by those who usually speak up for the poor. Some would like to go further by introducing patently regressive policies such as minimum pricing, fat taxes and soda taxes. The ‘public health’ and environmentalist agenda appears to trump traditional concerns about poverty and inequality.

For many years, anti-poverty policies in the UK have been based on an inefficient, bureaucratic and complex system of benefits and tax credits. This system has led to a ruinously expensive welfare state that has increasingly been paid for by stealth taxes and sin taxes. These indirect taxes are disproportionately paid by the poor. In 1977, the poorest quintile spent 22 per cent of its disposable household income on indirect taxes. Today the figure is 30 per cent. By contrast, the richest quintile has seen its share of income spent on indirect taxes fall from 20 per cent to 15 per cent. Rising sin taxes and stealth taxes have inflated living costs for low-paid workers while clawing back large sums of money from those who live on benefits. For many of those in the bottom half of the income distribution, this amounts to giving with one hand and taking with the other.

In a new IEA report, Aggressively Regressive, we propose cutting duty on alcohol, tobacco, petrol and diesel by half, scrapping green energy subsidies and reducing VAT to 15 per cent as an important step forward in reducing the cost of living that would have the greatest impact on the poor. At this lower rate, ‘sin taxes’ would still comfortably exceed the costs of externalities and infrastructure that are associated with these products.

This proposal is not as radical as it might first appear. Virtually no other country in the EU has such high taxes on alcohol, tobacco and fuel. Halving tobacco duty would bring it close to the EU average and lowering VAT to 15 per cent would bring it to a level that was the norm between 1979 and 1991. Halving motor fuel duty would make petrol cheaper than it is in most EU countries, but it would remain more expensive than it is in the USA and would be about the same price as it was in Britain ten years ago (in real terms).

Nearly all EU countries have much lower alcohol taxes than Britain. Most of them, including Spain, Italy and Germany do not charge any duty on wine at all and the vast majority have beer duty that is less than half of the current British rate (Ireland, Sweden and Finland are the only exceptions). Indeed, most EU countries levy beer duty at less than twenty per cent of the current British rate.

In summary, the kind of tax rates we propose are not unusual by international and historical standards. On the contrary, it is the current system of punitive and regressive indirect taxation that is the aberration.

Head of Lifestyle Economics, IEA

Christopher Snowdon is the Head of Lifestyle Economics at the IEA. He is the author of The Art of Suppression, The Spirit Level Delusion and Velvet Glove; Iron Fist. His work focuses on pleasure, prohibition and dodgy statistics. He has authored a number of papers, including "Sock Puppets", "Euro Puppets", "The Proof of the Pudding", "The Crack Cocaine of Gambling" and "Free Market Solutions in Health".

6 thoughts on “The consumption taxes that keep people poor”

  1. Posted 14/10/2013 at 15:00 | Permalink

    That’s all very well, but then how on earth will they fund the armies of finger-wagging jobsworths who infest ‘Public Health’ and its myriad offshoots? Let’s be realistic here. The likes of ASH et al rely on those sin taxes to enable them to bully and punish the people who are paying them.

  2. Posted 14/10/2013 at 15:38 | Permalink

    The fact is the poor PAY no taxes; their employers and the producers of their consumable items do.

    Employers pass on some of the taxes on employment under the guise of PAYE etc and producers pass on things like VAT in the product price.

    The point therefore is surely that the government are taxing everybody too heavily and the weighting is against the poor.

    Why then do the government want all this money? Overseas AID, Sports and Culture, propping up the banks?

    Little point in fiddling arouind with lower taxes on booze and fags which will simply then be loaded onto other things when the fish that require frying are vastly bigger.

    The first Country to drastically reduce the size of its government will find its fortunes have changed markedly for the better.

  3. Posted 14/10/2013 at 20:23 | Permalink

    I’m not sure that I am understanding waramess correctly. Tobacco product manufacturers are obliged to add duty to the price of their products. They pay the duty at the ‘tax point’. The duty is then passed on down the line of wholesaler, retailer and then purchaser. If the duty on a packet of 20 cigs is, say, £6 when the product leaves the manufacturer, it is still £6 when it reaches the purchaser. We should note that manufacturer, wholesaler and retailer do not pay the duty. It is the end purchaser who does. The others are merely tax collectors. Thus, if the poorest among us are the people who are spending more of their money on the products, it is the poorest who are paying a disproportionate amount if their income in duty. Whether they are being silly or naughty in spending their money in that way is not relevant.
    I agree with waramess that the money raised by these duties would have to be found from elsewhere, but I am not sure what the ‘net’ effect of reducing duties would be. Would there be savings by cutting duties? I would have thought that there would be savings connected to trying to stop smuggling. Maybe there would be savings in duty collection costs. Maybe fewer people would buy such products abroad. But Snowden’s point is precisely that the distribution of the tax burden is inequitably slanted to ‘punish’ the poorest people.
    However, there is a huge elephant in the room, isn’t there? The various Zealots want everyone else in the world to raise their duties to the same lever of the UK and Ireland!

  4. Posted 15/10/2013 at 11:10 | Permalink

    Junican, I would like to explain: a producer, (as well as the wholesaler and the retailer) has many costs and all are passed on to the consumer in the price of their products.
    I do not seek to obfuscate, it is the common perception of taxes being a Kaleidoscope of payments to the revenue that does so. Wages and salaries are a part of those costs but we do not think of a producer as the “collector” of wages and salaries.
    All taxes, like all other costs of production, end up being paid for by the consumer but the way in which tax collection is perceived hides from the ordinary man in the street the terrifying damage done by big government to the productive sector
    Ideally we should see but one tax and that at the moment would be 50 percent on turnover. Forget the concept that our tax system favours the poor; it does not, as is so eloquently set out in the article and everybody would be able to see clearly the true cost of government.
    I suppose that it will never happen, certainly never more or less likely than a reduction of the punitive taxes imposed on alcohol and tobacco so my point was, better to go after the big fish (the tax system as a whole) rather than chase a moving target (taxes on individual products).

  5. Posted 16/10/2013 at 02:49 | Permalink

    Thanks for that, waramess.
    Would that it were possible! We have seen calls for simplification of all tax systems, but without success. But why is it that there is no success? It can only be because there are vested interests which prefer the status quo.
    What is horrible about this ‘status quo’ is that it encourages the creation of jobs which are designed to inhibit growth. These jobs (in regulations, for example) actually damage the producer of the funds which sustain the jobs!
    It seems to be a common phenomenon at this time for certain wealth creators to be inhibited by the regulators who are sustained by the wealth creators. Such regulators have an inbuilt demand to perpetuate themselves. Therefore they need to produce more regulations to justify their existence. That is not uncommon.

    Is it not obvious that far too many people are employed simply to damage growth? Is it not obvious that it is the Government (not the politicians) which is driving the damage? Politicians ought to get a grip. They were not elected to concur with the self-perpetuating opinions of civil servants.

  6. Posted 08/11/2014 at 12:36 | Permalink

    The Greens in their 2015 manifesto pledges appear to solve this, by replacing most benefits (housing benefit a work in progress) that are hit by the double whammy of stealth indirect taxes, VAT and income tax, even though far below the basic tax allowance.

    There would need to be no benefits admin DWP / private contracts and Jobcentres,
    needed for The Greens’ policy of:

    – universal Citizen Income, non-withdrawable, non-means tested, automatic by right of citizenship

    – Bettered State Pension,
    that gives everyone basic food money when for so many state pension sole money in old age,
    rather than now when so many will be left penniless forever in old age
    from the biggest con in political history
    of the flat rate pension (Pension Bill 2014),
    that is withering away the state pension,
    already the lowest of all rich nations bar poor Mexico.

    This would solve the 70 per cent rise in benefit sanctions, which mean no benefit no access to food vouchers to food banks, themselves only 3 vouchers permitted per year. Benefit sanctions for months on someone 60 and disabled as well as on young family with new baby, when it takes about a month to starve to death. Doctors are saying again and again the massive rise in malnutrition hospital admissions.

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