Taxation and Economic Incentives on Health-Related Commodities: Alcohol, Tobacco and Food
Abstract
This chapter provides a detailed analysis of the economic, legal and public policy rationales for the application of taxes and other fiscal measures on health-related commodities. The motivation for such taxes has been more often linked to the fiscal revenues generated than to their potential public health benefits. However, especially in more recent times, an increased emphasis has been placed on the latter by many governments, as evidence emerged of the adverse public health, social and economic consequences of the consumption of certain commodities.
An increasing number of governments are seeking to expand their use of fiscal measures to promote healthier behaviours, not only by increasing tax rates on commodities such as tobacco products and alcoholic beverages, but also by exploring the scope for taxing selected foods and non-alcoholic beverages as a way to make people’s diets healthier. A number of countries apply different tax rates to certain food categories, and some have specific taxes on foods high in salt, sugar or fat, and on sugary drinks. Only in the past two years, countries such as Denmark, Hungary, Finland and France introduced taxes on various foods and non-alcoholic beverages, and many more have been debating the possible use of similar measures.
The key public health rationale for the use of taxes on health-related commodities lies in their ability to change people’s consumption behaviours. Additional health benefits may derive from the role possibly played by taxes as incentives to product reformulation. For instance, in 2012, many beer producers in the United Kingdom decreased the alcohol content of their brands sold in the United Kingdom by 0.2% to avoid an increase in duties. As with other attempts to use taxes to prevent some adverse outcome (e.g. environmental taxes), a key issue becomes the proximity of the tax point to the behaviour being targeted. The closer is the tax point to the behaviour, then (other things being equal) the more likely is the tax to have a beneficial impact. Excises introduced for public health purposes illustrate the dilemma clearly. Although for administrative reasons the tax may be levied earlier in the supply chain, the tax point is generally the purchase of the product by a consumer. Tobacco is always harmful, in whatever way and quantity it is consumed (although the harm will be even greater in an environment which results in secondary smoking). The relationship is less strong with alcohol, because the quantity consumed and the manner in which it is consumed (e.g. regular vs. binge alcohol use) determines the harm which may be caused. This relationship is even looser with diet-related taxes. This does not mean that taxation is an inappropriate instrument, but rather that, in addition to the harms discouraged by the tax, the welfare of a broader group of consumers will be affected.