Commentary: Beware the hidden costs of sin taxes

Commentary: Beware the hidden costs of sin taxes

Coca-Cola and PepsiCo engage in intense lobbying to kill any legislation against soft drinks,
How and where could sin taxes go wrong? (Photo: AFP)

SINGAPORE: In 2011, the Danish government became one of the first governments in the world to levy a tax that targeted unhealthy food.

Hailed as a progressive move, the Danish fat tax was supposed to be a prime example of how governments used policy to help people, who are notoriously irrational, make better decisions.

But the tax on foods that had elevated levels of saturated fat turned out to be an experiment that went horribly wrong.

Instead of switching away from unhealthy foods, Danes hoarded items such as butter to prepare to avoid paying the tax. And when the tax came, they simply crossed the borders to Germany to buy the foods that were being taxed.

It hurt retailers and led to the loss of thousands of jobs. The situation got so bad that just a year after it was implemented, the Danish tax ministry withdrew the tax.

A tax on sugar here in Singapore has been discussed as a serious option for the government as it looks for a way to not just address public health concerns, but potentially meet rising spending pressures.

Just last month, at the People’s Action Party annual convention, Prime Minister Lee Hsien Loong suggested that a tax hike was on its way.

"(Finance Minister) Heng Swee Keat is right when he said that raising taxes is not a matter of whether but when," said PM Lee.

His speech sparked frenzied speculation about what, when and how much taxes will be raised.

But while raising taxes on goods such as sugar, alcohol and cigarettes may seem tempting, the Danish experience shows sin taxes can lead to unintended consequences.

THE CASE FOR SIN TAXES

The rationale behind these "sin taxes" is an appealing one. It achieves two aims with one move: Reduce consumption of undesirable goods while boosting government coffers.

FILE PHOTO: Lucky Strike cigarettes seen during manufacturing process in BAT cigarette factory
Sin taxes to reduce consumption of undesirable goods have received international attention in recent years. (File Photo: REUTERS/Michaela Rehle)

Excessive gambling, for instance, can destroy families, result in broken homes and lead to many other social ills. Smoking and drinking are also linked to a host of health problems which eventually result in higher health costs for the state. Sugary drinks are also a big factor in health problems such as Type 2 diabetes and obesity.

To this end, there is a body of growing evidence to show taxes do work to reduce consumption.

Take taxes on soda for instance. In 2014, Berkeley in California became the first US city to pass a tax on sugar-sweetened drinks.

According to a new report in the journal PLOS Medicine, researchers found that one year after the tax was implemented, sales of sugar-sweetened drinks in the city plunged by almost 10 per cent.

Similarly, a sugar tax in Mexico seems to have done the trick. A study showed that there was a 5.5 per cent drop in the sales of sugary drinks the year after the tax was introduced. In the second year, sales declined by a further 9.7 per cent.

TAXING THE SINNER, NOT THE SINS

But such taxes are not without its flaws and any move to impose new or raise current taxes should be made with some caution.

For one thing, these taxes are regressive. Studies have shown lower-income groups tend to suffer the brunt of sin taxes, especially on tobacco and sugar.

According to the 2013 Singapore Household Expenditure Survey, the bottom 20 per cent of households spend 9.7 per cent of their income on food. The figure for the highest earning households was just 4.8 per cent.

Given that sugar is a common ingredient in many of the cheaper options for food, the tax places an unnecessary burden on lower-income groups, Nanyang Technological University economist Euston Quah has argued in an editorial.

drinking alcohol
While sin taxes sound like an attractive solution to social and health problems, they are not without flaws. (Photo: AFP) 

Second, implementation can potentially be messy.

Some countries such as Mexico have introduced taxes that target soft drinks. But it is difficult to distinguish what exactly is an undesirable drink.

For instance, are bottled fruit juices considered soft drinks? Many companies market them as being health drinks but they are equally unhealthy. A study by the journal Nutrition showed that the amount of sugar in some of these fruit juices are close to the levels in soft drinks.

One alternative is to target sugar levels but this leads to another problem: What about processed food, which contains high levels of sugar?

There is also the question of white rice and other local foods such as noodles, gula melaka desserts and teh tarik. Such food items are also big contributors to the risk of diabetes. Should these foods also be taxed?

Third, people may simply avoid such taxes altogether. In the Denmark case, the Danes simply went to Germany and Sweden to get their butter fix. It would not be unthinkable for Singaporeans to drive to Johor Bahru to buy their sugar in large quantities, as some do now with infant milk powder.

The rise of e-commerce also means individuals may end up buying sugar and sugary products directly from retailers overseas. It may be difficult to enforce the tax on thousands of such parcels moving through the borders every day.

These pitfalls show that raising taxes on sinful goods is fraught with challenges and can result in unintended consequences.

Taxes that target the sin may end up punishing the sinner instead.

Aaron Low was the former deputy business editor with the Straits Times and is currently a partner with content marketing agency The Nutgraf.

Source: CNA/sl

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