You have to be careful when taxing products. Levies on tea have been known to inspire wars of independence. Yet governments, having set a precedent by taxing alcohol, tobacco and fuel, are asking consumers across the world to pay for the privilege of consuming a range of hitherto-blameless items including sugary soft drinks and high-fat fast foods.
“We have seen a huge growth in the whole area and expansion into new products,” says David Duffy, Partner, Indirect Tax, KPMG in Ireland, and Head of KPMG’s Global Indirect Tax Policy Group. It is estimated that there is now a tax on sugary drinks in at least 35 countries, he points out, some 20 of which have been introduced since 2015. This shift is partly driven by changing public attitudes to what it is – and isn’t – acceptable to tax. Governments are also reacting to worries over the health and environmental impact of consuming certain products and have also found these taxes to be a politically convenient way to increase revenue. For all of those reasons, this looks like a trend that is only going to gather momentum.
“My expectation is that there will be more of these taxes, perhaps on high-salt and high-fat containing foods, for example. Health will continue to be a focus in response to obesity, and environmental taxes are also well established,” says Duffy.
The attraction for governments is obvious. In marked contrast to traditional revenue raisers such as taxes on corporate or personal income, ‘sin taxes’ on consumption can be less troublesome politically – voters at least have the choice of whether to pay up and continue to enjoy their favorite vice, or save money and abstain. “The feeling is that governments have to start somewhere, and it can be more difficult for people to argue against a tax, which at least in theory is designed to make them healthier,” Duffy adds.
Reducing sugar consumption
In 2013, the Mexican government introduced a tax on high-sugar soft drinks and on calorie-dense foods like national favorites tacos, tortillas and fried chicken in what was, ostensibly, an effort to tackle the country’s growing obesity crisis. Type 2 diabetes kills an estimated 70,000 Mexicans every year.
Before the tax was introduced, the average Mexican drank no fewer than 163 liters of sugary carbonated beverages a year – 40 percent more than Americans. There’s even a word in Spanish for soft drink addicts – cocacolera. The argument was that taxing the stuff would raise prices and cut consumption, boosting the nation’s health and generating much needed revenue. It seems to have worked, on one level at least – consumption fell by an average of 7.6 percent per year in the two years following the introduction of the levy, roughly equivalent to 5 US cents per liter.
Perhaps encouraged by Mexico’s experiment, the UK followed suit in April 2018, introducing its own Soft Drinks Industry Levy. This amounts to a tax of 24 US cents per liter for drinks containing over 5g of sugar per 100ml, and 31 US cents for those with over 8g per 100ml.
Although obesity and diabetes levels are lower in the UK than in Mexico, they are among the highest in Europe. There is widespread concern that British children consume too much sugar – research from Public Health England recently claimed that the average 10-year-old child in the UK has already had enough sugar to last until they are 18, were they to consume ‘only’ the maximum recommended daily amount.
One aspect of ‘sin taxes’ that appeals to cash-strapped governments is that whatever happens, it can be painted as a win. Either revenues go up, or consumption falls. No wonder the motives for applying sin taxes can be mixed, says Professor Mohan Sodhi of London’s Cass Business School. He points out that in India alcohol consumption is rising despite heavy taxation. “Alcohol advertising is illegal but companies find a way around it. Almost all the big TV shows feature people drinking heavily, which creates huge demand.”
So what has turned out to be a lucrative source of tax revenue can be justified as an attempt to reduce consumption. “There is asymmetric information between the consumer and the company. If governments really want to reduce consumption of harmful substances, the only thing that works is addressing that asymmetric information through public education campaigns. Education works, but it makes governments poorer not richer because those campaigns cost money,” says Sodhi.
Excise duty on alcohol is seen as one of the original sin taxes – duty on spirits was introduced in the UK in 1643, and on beer in 1690. But the concept of taxes aimed at influencing or controlling consumers’ behavior goes back much further. The Roman sumptuary laws were introduced to underline social status and limit what people could spend on food, clothing and luxuries.
Taxes on tobacco substantially pre-date the discovery in the 1950s of the link to lung cancer, being first introduced in England in 1660 and the US in 1864. Even the sugar tax has a longer history that you might think – the Danes introduced a tax on soft drinks in the 1930s. By 2013, it was bringing in US$68m a year, but the government repealed it anyway. Why? Because illegal sales of soft drinks smuggled across the border were also costing an estimated US$44m in lost sales tax, as well as fueling something of a crime wave.
To these historic trends, add the impact of modern globalized markets and you have the perfect economic climate for indirect taxes aimed at consumption rather than production. “In most countries, excise taxes are a substantial source of revenue. But the trend for lower tariffs on international trade and more global trade means that those revenues tend to be reducing. The authorities are looking for new taxes to replace them.
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