“Sin Taxes” are aggressively regressive
26 July 2018
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Are “sin” taxes on food, soft drinks, tobacco and alcohol regressive?
As my colleague Christopher Snowdon has outlined in his latest report, this is a question that shouldn’t really need to be asked. Any tax that takes a greater share of income from the poor than the rich is, by definition, regressive. End of story.
Or so you’d think. In fact, the latest argument favoured by advocates of sin taxes is that they have a ‘progressive’ impact on health – in the sense that their alleged health benefits disproportionately “benefit” the poor.
This Orwellian position has been adopted by a number of campaigners – including Prof Simon Capewell of the Faculty of Public Health, who justified the introduction of the recent UK sugar tax in these terms.
“Poorer people would benefit more from a sugary-drinks tax, so it would be progressive in health terms and not regressive in financial terms to any significant degree”, he told the Guardian.
Yet given the trivial impact of sugary-drinks taxes on consumption habits and calorie intake, advocates are often guilty of exaggerating such “benefits”. Mexico, for instance, has been hailed as a success story for its 10 percent tax on sugary drinks – yet even accepting the most generous estimates, the Mexican sugar tax is believed to have reduced sales of sugary drinks by about 6 percent. This amounts to an average per capita decrease in calorie intake of just 16 calories – a drop in the calorific ocean, by any estimates. The regressive financial impact of these taxes, on the other hand, is extremely well documented.
Public Health czar Michael Bloomberg took this line even further at a recent WHO Conference, by actively praising the regressive nature of such duties. His full speech really has to be seen to be believed.
“Some people say, well, taxes are regressive. But in this case, yes they are. That’s the good thing about them because the problem is in people that don’t have a lot of money. And so, higher taxes should have a bigger impact on their behaviour and how they deal with themselves.”
Putting aside the nauseating sight of one of the world’s richest men championing regressive taxation, do these claims stack up to reality?
Bloomberg’s thesis rests on the assumption that, having less disposable income, the poor will be more vulnerable to price fluctuations – and therefore, more likely than the wealthy to shelve their ‘bad habits’ when prices rise. This may make sense on an intuitive level, yet decades of high taxes on tobacco and alcohol in many different countries suggest otherwise. Despite very high rates of excise tax, smoking remains much more common among low-income groups in Britain (and most common of all amongst the very poorest). With sugar taxes too, low-income consumers appear to be less responsive to price changes than the rich.
In the case of alcohol, there is a closer relationship between affordability and consumption in that low income groups tend to drink less than high income groups. Yet this, too, does not translate into better overall health outcomes – those socio-economic groups which consume the least booze suffer the most alcohol-related harm, in a phenomenon known as the ‘alcohol harm paradox’.
Accepting the Bloomberg diagnosis is also to ignore, or at least neglect, the underlying reasons why people make lifestyle decisions. As Chris notes elsewhere, “It will always be cheaper to drink water than wine, to eat boiled vegetables rather than McDonald’s and to be a nonsmoker rather than a smoker.” If affordability were the decisive factor, he adds “the poor would be paragons of health and the rich would be gout-ridden, chain-smoking wrecks.”
Price-sensitivity doesn’t automatically equate to healthier behaviour. Just like everyone else, low-income groups will try to avoid excessive taxation wherever possible, whether by switching to cheaper brands or entering the illicit market for alcohol and tobacco. In the case of the sugar tax, other substitution effects are common, whereby consumers switch to sugar-rich products not subject to the levy, or other calorific alternatives. Others will simply choose to take the financial hit and continue to enjoy their chosen pleasures.
Here, as the report lays bare, we are not dealing with trivial sums of money – indirect taxes swallow a staggering portion of low incomes compared to high incomes. In Britain, the poorest decile spend over a third (34 percent) of their disposable income on indirect taxes, including 2.9 percent on tobacco duty and 2.0 per cent on alcohol duty. For the richest decile, the equivalent figures are 14 per cent, 0.1 per cent and 0.9 percent respectively.
Of course, not every part of the tax system can be progressive, but advocates should at least be honest about the disproportionately high burden sin taxes place on low-income households. If they were feeling particularly generous, they might even acknowledge the limitations of “sin taxes” to nudge people in a healthier direction – but I won’t hold my breath.
Read Chris’s report in full here.
As my colleague Christopher Snowdon has outlined in his latest report, this is a question that shouldn’t really need to be asked. Any tax that takes a greater share of income from the poor than the rich is, by definition, regressive. End of story.
Or so you’d think. In fact, the latest argument favoured by advocates of sin taxes is that they have a ‘progressive’ impact on health – in the sense that their alleged health benefits disproportionately “benefit” the poor.
This Orwellian position has been adopted by a number of campaigners – including Prof Simon Capewell of the Faculty of Public Health, who justified the introduction of the recent UK sugar tax in these terms.
“Poorer people would benefit more from a sugary-drinks tax, so it would be progressive in health terms and not regressive in financial terms to any significant degree”, he told the Guardian.
Yet given the trivial impact of sugary-drinks taxes on consumption habits and calorie intake, advocates are often guilty of exaggerating such “benefits”. Mexico, for instance, has been hailed as a success story for its 10 percent tax on sugary drinks – yet even accepting the most generous estimates, the Mexican sugar tax is believed to have reduced sales of sugary drinks by about 6 percent. This amounts to an average per capita decrease in calorie intake of just 16 calories – a drop in the calorific ocean, by any estimates. The regressive financial impact of these taxes, on the other hand, is extremely well documented.
Public Health czar Michael Bloomberg took this line even further at a recent WHO Conference, by actively praising the regressive nature of such duties. His full speech really has to be seen to be believed.
“Some people say, well, taxes are regressive. But in this case, yes they are. That’s the good thing about them because the problem is in people that don’t have a lot of money. And so, higher taxes should have a bigger impact on their behaviour and how they deal with themselves.”
Putting aside the nauseating sight of one of the world’s richest men championing regressive taxation, do these claims stack up to reality?
Bloomberg’s thesis rests on the assumption that, having less disposable income, the poor will be more vulnerable to price fluctuations – and therefore, more likely than the wealthy to shelve their ‘bad habits’ when prices rise. This may make sense on an intuitive level, yet decades of high taxes on tobacco and alcohol in many different countries suggest otherwise. Despite very high rates of excise tax, smoking remains much more common among low-income groups in Britain (and most common of all amongst the very poorest). With sugar taxes too, low-income consumers appear to be less responsive to price changes than the rich.
In the case of alcohol, there is a closer relationship between affordability and consumption in that low income groups tend to drink less than high income groups. Yet this, too, does not translate into better overall health outcomes – those socio-economic groups which consume the least booze suffer the most alcohol-related harm, in a phenomenon known as the ‘alcohol harm paradox’.
Accepting the Bloomberg diagnosis is also to ignore, or at least neglect, the underlying reasons why people make lifestyle decisions. As Chris notes elsewhere, “It will always be cheaper to drink water than wine, to eat boiled vegetables rather than McDonald’s and to be a nonsmoker rather than a smoker.” If affordability were the decisive factor, he adds “the poor would be paragons of health and the rich would be gout-ridden, chain-smoking wrecks.”
Price-sensitivity doesn’t automatically equate to healthier behaviour. Just like everyone else, low-income groups will try to avoid excessive taxation wherever possible, whether by switching to cheaper brands or entering the illicit market for alcohol and tobacco. In the case of the sugar tax, other substitution effects are common, whereby consumers switch to sugar-rich products not subject to the levy, or other calorific alternatives. Others will simply choose to take the financial hit and continue to enjoy their chosen pleasures.
Here, as the report lays bare, we are not dealing with trivial sums of money – indirect taxes swallow a staggering portion of low incomes compared to high incomes. In Britain, the poorest decile spend over a third (34 percent) of their disposable income on indirect taxes, including 2.9 percent on tobacco duty and 2.0 per cent on alcohol duty. For the richest decile, the equivalent figures are 14 per cent, 0.1 per cent and 0.9 percent respectively.
Of course, not every part of the tax system can be progressive, but advocates should at least be honest about the disproportionately high burden sin taxes place on low-income households. If they were feeling particularly generous, they might even acknowledge the limitations of “sin taxes” to nudge people in a healthier direction – but I won’t hold my breath.
Read Chris’s report in full here.
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Economic evidence shows that lower prices drive economic growth generally.
There seems to an assumption by some that as “luxury” spending power decreases that necessary items spending will not be affected. What about some poor people who when faced with higher “sin item” prices buy lower quality less nutritious food which may lead them to get fatter and less nourished?
“Sin taxes” should be opposed because it is part of a policy structure that is often used, and designed, to patronize citizens. Patronizing manners should be stamped out even when the government or legislature is doing it. Particularly galling examples of patronizing behaviour by some MPs is when they imply that those who voted for Brexit were misled as if they were sheep.