Corrective taxation and behaviour – the saliency of tax ...

Corrective taxation and

behaviour – the saliency

of tax instruments

12-07-2018

OUTLINE

Introduction

The purpose of taxation

Properties of a good tax system

Economic efficiency, equity, administrative efficiency,

flexibility

PART 1: Theoretical considerations

The rationale for corrective taxation

PART 2: Corrective taxation in theory and practice:

Tobacco and alcohol taxes

Sugar-sweetened beverages (SSBs)

Purpose of taxation

Broad tax policy objectives:

Revenue raising

Social objectives

Market failures

Behavioural changes

Tax incentives

International competitiveness

Properties of a good tax system

Equity

Promote fair income distribution

Benefit approach – benefit taxes (user charges)

Ability-to-pay approach – horizontal versus vertical equity

Economic efficiency

Minimisation of distortive effect on taxpayers’ choices

Administrative efficiency

Minimisation of administrative and compliance costs

Flexibility, simplicity, transparency

Flexibility

Facilitate macroeconomic stability and economic development

Corrective taxation and behavioural

change

Taxes meant to change behaviour

Examples: "Sin taxes" on tobacco and alcohol products

Themes:

How do consumers respond to such taxes?

Do such taxes have the intended effects on behaviour?

Theoretical rationale

Adam Smith (1776) supported taxation of goods such as

tobacco, alcohol and sugar as they are not necessities.

Corrective (or “Pigouvian”) taxes:

Correct for the presence of externalities or internalities in a

market:

externality: costs imposed on others

internality: costs imposed on the individual themselves

Examples: excise taxes on alcohol, tobacco, motor fuels

Attempts by taxpayers to avoid or reduce their tax liabilities

can result in unintended consequences – may cause

inefficiencies

Results: Misallocation of resources / adverse effects on social

welfare

Avoiding such unintended effects should be an important

consideration in the design of taxes

Historical example: The window tax (Oates and Schwab,

2015)

Behavioural responses and efficiency

Effects of the Window tax

Regressive nature and health effects of

"daylight robbery"

Tobacco and Alcohol

Externalities associated with alcohol

and tobacco

Tobacco (see Ekpu and Brown (2015), Black et al (2015)):

Direct costs of smoking: costs related to smoking-related illnesses

Indirect costs: costs of second-hand smoking, loss of productivity due to illness and absent smokers, smoking-induced fires, etc.

Intangible costs: emotional pain of illness and loss of life

Alcohol

Direct costs of alcohol consumption: cost of policing, healthcare, expenses related to fatal and non-fatal traffic accidents, violence and property damage, ‘avoidable’ illnesses such as liver and cardiovascular disease

Indirect costs: loss of productivity due to illness and absence from workplace, etc.

Intangible costs:emotional pain, depression, regret associated with alcohol-related harm.

An estimation of tangible external costs of alcohol consumption in SA – 1.5% of GDP [Parry (2009) in Black et al (2015)].

Cigarette consumption in Africa

Source: Blecher and Ross (2013)

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South Africa Rest of AFRO

Consumption of alcohol in SA

Source: Van Walbeek and Blecher (n.d.)

Design of corrective taxes – South Africa (I)

Cigarettes:

Blecher (2015) indicates that health consequences are not related to nicotine content; rather the quantity smoked and duration of smoking.

Taxation effective in reducing smoking (tax increases price, which reduces quantity).

SA: uniform specific tax on cigarettes - same tax applied to every cigarette. Tax set such that it is 50% of retail price.

Easier to administer

Predictable and stable revenue streams

Specific taxes should be updated regularly (especially during inflationary times)

Cigarette consumption and excise taxes in SA

Source: Blecher (2015)

Design of corrective taxes – South Africa (II)

Alcohol:

Blecher (2015): clear relationship between alcohol

consumption and alcohol-related diseases and injuries. But,

there is also a link between the dosage of alcohol and harm

caused.

SA: tax is applied to volume of alcohol, instead of volume of

beverage – such a system on beer and spirits (wine has a flat

tax).

Excise taxes on alcohol are levied as specific taxes

but specific taxes can be eroded by inflation

Corrective taxation – South Africa

Source: National Treasury (2018)

Behavioral response to corrective taxes

– Elasticities

South Africa evidence:

Cigarettes:

Average price elasticity of demand ranges between 0.5 and 0.7 (Van Walbeek, n.d.).

Alcohol:

Estimated price elasticities: normal beer: ‐0.40; light beer: ‐0.47; low-price wine: -1.08; medium-price wine: ‐0.84; high-price wine: ‐0.42 and spirits: ‐0.75 (National Treasury study - see Van Walbeek and Blecher, n.d.).

Van Walbeek and Blecher (n.d.): estimated price elasticities for alcohol for the whole population using NIDS waves 1 and 3 data: -0.52, -0.56, respectively. They also found the poor has more

price elastic demand.

Excise taxes on cigarettes – empirical

evidence from SA

People respond to changes in price of cigarettes, the poor and young typically more responsive.

Marked decrease in aggregate and per capita consumption of cigarettes since 1993 (when the govt. raised real excise taxes on cigarettes (Van Walbeek & Blecher, n.d.).

Claims that taxes would increase illicit trade not supported by empirical research. Excise revenue from cigarettes on average 0.7% below budget (2000–2012). Study of Van Walbeek (2014) finds no evidence of increased illicit trade in cigarettes between 2002-2009, although large increase in illicit trade in 2010-2011, but in 2012 illicit market share decreased.

Incentive to shift to another form of tobacco (pipe, cigarette tobacco) mitigated by similar increases in excise taxes to that of cigarettes (Van Walbeek, n.d.)

[See Economics of Tobacco Control Project, UCT, for other (recent) research publications on tobacco taxation: http://www.tobaccoecon.uct.ac.za/etcp/publications]

Excise taxes on alcohol – impact in SA

According to Blecher (2015), producers could choose not to pass

tax differences between high and low alcohol beer to consumers -

might absorb higher taxes on beer with higher alcohol content, but

instead choose to save the taxes on those with lower alcohol

content.

Could opt to advertise or promote to lower-tax products, which

ceteris paribus, would increase profits.

Producers could also choose to reduce the alcohol content.

The dose tax system has caused a significant shift in advertising

from higher alcohol to lower alcohol beers.

Excise taxes on beer in SA

Source: Blecher (2015)

Excise taxes on beer in SA

Source: Blecher (2015)

Unintended effects?

Substitution of illicit and cheaper products

Adverse impact of tax hikes on income distribution within

households (see Black & Mohamed, 2006).

Sugar-sweetened beverages

Externalities associated with sugar

consumption

Health risks:

Increased risk of excessive calories intake (leads to obesity)

Obesity increases risk of heart disease, type 2 diabetes, strokes

Tooth decay in children

Health costs are mainly carried by the individual; however, external

costs are borne by society (e.g. public health costs).

Full costs of sugar consumption are not taken into account by the

individual at the point of consumption.

Taxation of food and beverage

products (e.g. SSBs)

Target primarily goods with high fat/salt/sugar content.

Non-alcoholic beverages: SSBs (soft drinks/sodas, cordials, sugar-added

juices)

Do particular health taxes change consumption behaviours?

Source: Wright et al (2017)

Do particular health taxes change

consumption behaviours?

Mexico

Price elasticities: Colchero et al. (2016)

Soft drinks was -1.06 and -1.16 for SSBs ((soft drinks, fruit juices, fruit

drinks, flavoured water and energy drinks),

Price increase in soft drinks associated with larger quantity consumption of

water, milk, snacks and sugar, and decreased consumption of other SSBs,

candies and traditional snacks.

Imposed a 10% tax on SSBs in January 2014 at the end of that year, there

was a 5.5% drop in sales. Over two years (to 2016), a further decrease to

9.7%, with the largest drop amongst the most socio-economic

disadvantaged households (Editorial, The Lancet Diabetes &

Endocrinology, 2017).

Price elasticities of demand

(urban households in Chile)

Source: Guerrero-López et al (2017)

Study concludes: “…subsidies to non-sweetened beverages and tax to soft

drinks could lead to increases in the substitutions for other healthier

beverages.”

Design of corrective taxes – South Africa

Sugar beverage levy (SBL) (1 April 2018)

Health promotion levy: first 4 grams of sugar per 100ml are to

be exempt. Thereafter, a tax of 2.1 cents per gram of sugar will

be levied.

Approximately 10% of a can of Coca Cola

Products containing intrinsic sugars, e.g. 100% fruit or

vegetable juices, are exempt from paying the SBL

“Over the MTEF period, R368 million is allocated to begin a public

awareness campaign to complement the health promotion levy on sugary

beverages and to establish a health technology assessment unit. The unit

will analyse the cost effectiveness of various health interventions.”

(National Treasury, 2018: 60)

Design of corrective taxes: UK

SSBs:

Tax on soft drinks, paid by producers and importers of soft

drinks – from April 2018

main rate charge: 18p/litre for drinks with 5-8g of sugar

per 100ml

higher rate charge: 24p/litre for drinks with >8g sugar

per 100ml

Source: HM Treasury, 2018 (https://www.gov.uk/government/news/soft-drinks-

industry-levy-comes-into-effect)

Corrective taxation: important considerations

Pass through of tax?

Distributional effects?

Tax revenues?

Do producers respond to incentives?

Unintended effects – substitutions?

Economic concerns – employment?

Changing behaviour - other options?

What options (other than taxation) could be considered?

- Information?

- Regulation?

- Nudges?

1) Galizzi, M. M. 2012. Label, nudge or tax? A review of health policies for risky behaviours. Journal of Public Health Research, Volume 1:e5: 14-21).

2) Arno, A. & Thomas, S. 2016. The efficacy of nudge theory strategies in influencing adult dietary behaviour: a systematic review and meta-analysis. BMC Public Health, 16:676.

References

Black, A., Calitz, E. and Steenekamp, T. 2015. Public Economics, 6th edition. Cape Town: Oxford University Press Southern Africa.

Blecher, E. 2015. Taxes on tobacco, alcohol and sugar sweetened beverages: Linkages and lessons learned. Social Science & Medicine. 136-137: 175-179.

Blecher, E. and Ross, H. 2013. Tobacco use in Africa: Tobacco control through prevention. American Cancer Sciety. Available: https://www.cancer.org/content/dam/cancer-org/cancer-control/en/reports/tobacco-use-in-africa-tobacco-control-through%3Dprevention.pdf.

Colchero, M. A., Salgado, J. C. Unar-Munguía, M., Hernandez-Avila, M. and Rivera-Dommarco, J. A. 2016. Price elasticity of the demand for sugar sweetened beverages and soft drinks in Mexico. Economics and Human Biology, 19: 129–137.

Editorial. 2017. Sweet success: will sugar taxes improve health? The Lancet Diabetes & Endocrinology. 5(4): 235.

Ekpu, V. U. and Brown A. K. 2015. The Economic Impact of Smoking and of Reducing Smoking Prevalence: Review of Evidence. Tobacco Use Insights, 8 (2015), pp. 1–35.

Guerrero-López, C. M., Unar-Munguía, M. and Colchero, M. A. 2017. Price elasticity of the demand for soft drinks, other sugar-sweetened beverages and energy dense food in Chile. BMC Public Health, 17:180.

National Treasury. 2017. Budget Review 2017. Available: www.treasury.gov.za.

National Treasury. 2018. Budget Review 2018. Available: www.treasury.gov.za.

Oates, W. E. and Schwab, R. M. 2015. The window tax: a case study in excess burden. Journal of Economic Perspectives, 29(1): 163-180.

Van Walbeek, C. 2014. Measuring changes in the illicit cigarette market using government revenue data: the example of South Africa. Tobacco Control.

VanWalbeek, C. n.d. Tobacco Excise Taxation in South Africa. World Health Organization. Available: http://www.who.int/tobacco/training/success_stories/en/best_practices_south_africa_taxation.pdf.

Van Walbeek, and Blecher, C. n.d. The economics of alcohol use, misuse and policy in South Africa. World Health Organization. Available: http://www.dpru.uct.ac.za/sites/default/files/image_tool/images/405/People/the-economics-of-alcohol-policy-in-south-africa.pdf.