The consumption taxes that keep people poor
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.