“A sin tax is levied on specific goods and services at the time of purchase,” explains Investopedia. “These items receive the excise tax due to their ability to be harmful or costly to society… Sin taxes seek to deter people from engaging in socially harmful activities and behaviours, but they also provide a source of revenue for governments.”
In South Africa, it’s the other way around, however. Sin taxes are primarily viewed as a source of revenue for the state. Says the South African Revenue Service:
“Excise duties and levies are imposed mostly on high-volume daily consumable products (for example petroleum and alcohol and tobacco products) as well as certain non-essential or luxury items (for example electronic equipment and cosmetics). The primary function of these duties and levies is to ensure a constant stream of revenue for the state, with a secondary function of discouraging consumption of certain harmful products.”
Intuitively, taxing “sin” is a no-brainer. Everyone is already taxed half to death. Government still cannot fund its salary bill, its debts, its wasteful and corrupt spending and its tremendous vanity projects. What better way to raise revenue than by taxing goods or services of which a majority disapprove, or which most people consider unnecessary luxuries?
Sin taxes are often defended as being Pigouvian taxes; that is, they are intended to pay for negative externalities, which force society or the government to assume some cost burden. A tax on polluting activities is a classic example of a Pigouvian tax. The original purpose of taxing tobacco was to fund programmes to help smokers quit or campaigns to prevent others from starting the habit.
However, the annual ritual of raising sin taxes belies the notion that they merely pay for externalities. Once the burden to society of, say, smoking, drinking or sugar consumption is covered, there is no need to continually raise the tax. The only motive to raise the tax then, besides raising revenue, is to discourage the consumption of the goods or services in question. That is, the tax is imposed for our own good, not the good of society.
It stands to reason that higher prices would correlate with lower demand. There are very few goods and services for which this relationship does not hold true. (The exceptions are called “Giffen goods”, and are typically luxury items for which a high price is a desirable attribute.)
In principle, the government has no business imposing “morality” on people by limiting their consumption of otherwise perfectly legal goods and services. Sin taxes punish not only those who consume such products to excess, but also those who use them responsibly and in moderation.
The apartheid government used to love legislating morality. Since our liberation from that oppressive regime, are we to subject ourselves to yet another paternalistic government that seeks to control in considerable detail what we do and how we live?
It is not at all clear that government experts know better than consumers themselves what’s best for them, or that a one-size-fits-all policy is appropriate to influence consumer behaviour.
The effectiveness of sin taxes is limited by the nature of what is taxed. Products that are addictive are less susceptible to demand reduction by higher prices.
For example, a recent empirical study by the US National Bureau of Economic Research found that the price of alcohol reduces demand among moderate drinkers, but is less effective for heavy drinkers, which is the category that one especially seeks to target by using tax as a policy instrument. A meta-analysis of 1,003 estimates from 112 studies also found that raising prices has a significant impact on alcohol consumption, but that the effect is smaller among heavy drinkers. A study conducted in Sweden suggests that when faced with higher prices, drinkers do drink less, but are also more likely to switch to cheaper, lower-quality alcoholic beverages.
Switching to lower-quality alternatives in the hope of paying less poses a risk to consumers. In South Africa, there are a large number of unregulated producers and sellers of alcohol. This makes drinkers vulnerable to buying contaminated liquor, exposing them to toxic or carcinogenic chemicals such as heavy metals, acetaldehyde, urethane, coumarin or alcohols other than ethanol.
With cigarettes, the same risk exists. As legal cigarettes become ever more expensive, consumers are turning en masse to cigarettes that circumvent the tax system. According to the 2018 National Tobacco Market Study, conducted by Ipsos, South Africa’s best-selling cigarette brands sell for around R10. Some sell for as little as R5 per pack. Non-organised shops account for 79.7% of all tobacco sales, and in these shops, 33.4% of all cigarettes sell for below R17.85, which is the minimum excise tax on a pack of cigarettes (R15.52) plus 15% VAT. The market for tax-free cigarettes is large and growing rapidly, despite promises of crackdowns by the tax authorities.
Sin taxes act anti-competitively. The effective cost of doing business rises for producers of commodities that are so taxed. If they could raise prices without reducing supply, they would have done so long before the tax was raised, so they must reduce supply. The higher costs and reduced supply pushes smaller, marginal competitors out of the market, which compromises not only price, but also consumer choice and product quality.
Sin taxes extend far beyond what most people would consider “sin”. The SARS page cited above mentions cosmetics, electronics, and fuel as other goods and services subject to excise tax. The list of products subject to specific or ad valorem excise tax includes many chemical industry products, motor vehicles, car radios, guns, pleasure boats, pinball tables, pool tables, casino game tables, bowling alley equipment, video game consoles, golf clubs and balls, table tennis tables, gym equipment, athletics equipment and swimming pools.
The price of fuel has an obvious and direct impact on the price of everything else that requires transport. The levy on fuel has doubled in the last six years, tripled in the last 10, and quintupled since the year 2000. This hurts everyone, but especially the poor, by raising the price of food and basic consumables along with everything else.
Electronics are a key underpinning for a modern economy. Levying taxes on electronics directly contradicts all the laudable talk of wishing to “bridge the digital divide” and participate in the “fourth industrial revolution”.
SARS recently implemented a tax on sugar-sweetened beverages, despite the fact that even by the research on which government based its justification, it will have a negligible impact on public health, and claims that a sugar tax works wither under scrutiny. Since the government also taxes gym equipment, its claims to be worried about obesity ring hollow.
Look out for a salt tax soon, and then a tax on fatty foods. The list of things that governments are willing to tax is long and bewildering: playing cards, blueberries, fur clothing, amusement tax, sex services, bagels, candy and tattoos.
Even illegal drugs have been taxed in several US states. You go declare your illegal stash to revenue collectors, who aren’t allowed to turn you in to law enforcement. You pay your tax, and get revenue stamps you can affix to your merchandise to prove you paid the tax. Apparently, very few people have actually paid this tax, and those that did are believed to be stamp collectors.
Sin taxes have a significant impact on the value chain of production. Everyone suffers lower revenue and lower profitability, from farmers to industrial manufacturers to the companies that retail taxed products, and everyone that supplies anything to the taxed industries. This has a very real impact on employment and wages, which exacerbates socio-economic problems. In South Africa, where almost 10 million people are unemployed, any policy that limits employment ought to be closely re-examined.
Sin taxes are regressive. They hurt the poor far more than they hurt the rich. Poor households who continue to buy products that are taxed have less left over to spend on other goods and services, such as food, clothes, housing, health care or education.
Suggesting that they should just quit buying the taxed products is pretty condescending. If you ground out a living in a shack on a patch of municipally-owned dirt with no view and hardly any entertainment, you might also like a drink or a smoke after a hard day’s manual labour. And who would deny a poor woman some lipstick, other than the government? Being judgmental is the preserve of the wealthy elite, but it is not always justified.
Sin taxes are not used for the purpose of addressing public health or social welfare concerns associated with the products being taxed. They go into the general treasury coffers, and are used to buy unrelated goods or services such as imported luxury cars for officials or bridges to nowhere.
Those goods and services are not produced in addition to what would otherwise be available on the market. They displace goods and services on the market.
“However the government gets the money it spends, the goods and services that it buys, or that are bought by the people to whom it transfers money, are thereby not available for other use. Those goods and services – not the pieces of paper that pay for them – are the real cost of government to the taxpayers.”
The effect of taxing one product to pay for another is to reduce supply and raise prices for people who never go near the taxed products. It also distorts markets and incentivises inefficient use of resources.
One example of an unintended and largely unexamined economic cost of raising sin taxes is the cost of lobbying against them. This is a dead-weight expense that otherwise would be unnecessary. It diverts resources from other, more productive uses, which might raise profits, employment, wages, and the general standard of living.
It is arguable that without the pernicious influence of sin taxes and similar government interventions in the market, the general welfare would be raised sufficiently that government could make up what it lost in sin taxes by collecting higher income taxes, company taxes or consumption taxes. A healthier economy benefits all.
The idea of using sin taxes as a means of raising revenue as well as a policy instrument to reduce demand is, of course, self-contradictory. The more successful government is at one, the less successful it would be at the other. The fact that SARS has declared revenue as its priority suggests that paternalistic concern for public health must take a back seat.
Given that revenue is a priority for SARS excise tax collection, it is surprising how little sin taxes actually raise. Despite having doubled in the last 10 years, and quadrupled since the year 2000, excise taxes add only R37-billion, or 3%, to total budget revenue, according to the 2017/18 budget review. Cigarettes alone raised R13-billion in 2015/16, but that has crashed to less than R11-billion in 2017/18. This represents a measly 0.8% of the national budget.
Excise taxes require a massive bureaucratic overhead to enforce, and impose significant burdens on the companies that must pay them. Since they’re not all that effective at generating revenue and have significant drawbacks, it would seem the case against sin taxes is pretty strong. DM