Sin tax: Issues and policy options

A few goods and services are known as ‘temptation’ is harmful to society and create negative externalities both at the individual and community level. The community-level externalities are generated at the various stages of the manufacturing process.

Tobacco, alcohol, gambling ventures, and club membership are generally considered temptation goods. A sin tax is designed to curtail the worldwide consumption and production of those goods; the latest inclusion is sugar [soda tax and obesity tax], for which the government is imposing taxes to curtail obesity in the youth and to reduce the harmful effect of sugar on health. Taxes on alcohol and tobacco have long been an essential means of raising revenues for public spending in many countries. There is now renewed interest in increasing taxes on these and other unhealthy products to achieve public health goals. Indeed, the taxes on these products reduce consumption and health-related problems in tandem, generating revenue for activities in improving the living standard through distribution mechanisms.

The conventional sin tax has a more objective transformation as a “ health tax” defined as those designed to increase the costs of manufacturing, distributing, retailing, and/or consuming health-damaging products. The current research profile includes the domain of sugar-sweetened beverages with conventional tobacco and alcohol products. There is a perceptible improvement in the curtailment of consumption of alcohol and tobacco in high-income countries, and taxes on products with significant sugar supplements could have a positive impact on consumption curtailment. Countries like the UK, Sweden, and Canada impose Sin Taxes on products and services, from tobacco and alcohol to lotteries, gambling, and fuel. Mexico imposed a Soda Tax in 2013. Sweden uses the excess tax collected from gambling to help people with gambling problems.

Those who create negative externalities, producers, and consumers must compensate society through specific penalties; the sin taxes seek to prevent people from participating in socially harmful activities. The simple demand law dictates that price increases above a ceiling level could have a drastic consumption curtailment with a beneficial effect on public health and revenue generation. It could be a significant source of revenue to defray the improvement of public health when a further tax on manufacturers could hurt the production level.

Adam Smith, in 1776 recommended that taxes on cigarettes, rum, and sugar are appropriate even in the laissez-faire government setup. Arvind Subramanian, a distinguished Indian economist and a former chief economic advisor to the government of India, recommended that in a unified GST regime, certain goods should attract a ‘Sin’ tax of 40 percent in 2019.

Bangladesh is among the first ten countries in the consumption of tobacco products; the list does not include India and Pakistan. Tobacco smoking is below 12 percent in the United States, and the average rate is less than 10 percent in the EU in 2020. Surprisingly, over 35 percent of adults in Bangladesh are addicted to tobacco and other ‘temptation’ products. A joint study by PROACTT (a collaboration of the American Cancer Society and Cancer Research UK), Bangladesh Cancer Society, and the Department of Economics, the University of Dhaka, manifests that “tobacco-induced deaths and diseases alone cost the economy of Bangladesh around Tk 305.6 billion ($3.61 billion) a year, which was equivalent to 1.4 percent of GDP in the year 2017-18.”

The current self-indulgent level of consumption of tobacco and allied products negates the constitutional responsibility of the government. Article 18(1) of the Constitution enshrines ‘the improvement of public health as one of the fundamental principles of state policy. Article 31 recognizes the protection of the right to life as a fundamental right.

However, Prime Minister Sheikh Hasina’s commitment to building a tobacco-free country by 2040 is a positive step, but the duration is too long; Bangladesh needs to catch up to the peer countries in the global index. Bangladesh ratified the WHO Framework Convention on Tobacco Control (WHO FCTC) in 2004. The Tobacco control law amendment proposals of MoHFW (Ministry of Health and Family Welfare) have been drafted in a manner that would purposefully address these obligations and also incorporate tobacco control-related global best practices in the country’s public health policy regime.

Given this reality, the health ministry’s recent initiative to amend and strengthen the existing tobacco control laws is a welcome move. Fortunately, there are active NGOs that have an explicit vision of the current status and the imperatives to free the country from the ‘temptation’ menace of the working people; the tier-based specific additional duty proposed for the upcoming national Budger FY 24 by the PROGGA [Knowledge for Progress] and the Anti-Tobacco Media Alliance [ ATMA] is a step towards the right direction.

The retail of the low-tier cigarettes to Tk 55 from Tk. 40 for 10 sticks, followed by Tk. 35.75 as a specific additional duty, could curb the ‘temptation’ menace to a significant level-- an automatic reduction in the consumption of the low-income cohort. A simultaneous price hike at the higher tiers also decreases the likelihood of users switching to cheaper brands. The specific tax, as recommended by the WHO and practiced by most countries, could reinforce the effectiveness of the tax system and be a lever in additional revenue augmentation of 0.5 percent of GDP as recommended in the strings of SDR 4.50 billion of the IMF loan.

The low-income countries constitute the lion’s share of smokers, approximately 80 percent, with a hefty burden of tobacco-induced deaths, diseases, and adverse economic and non-economic impacts. The “ugly secret of global poverty,” authored by Nicholas Kristof, citing conversations with people in Congo, as well as research by Imrovement for Poverty Actions [IPA Research Affiliates], Nobel Laureates Abhijit Banerjee and Esther Duflo, emphasized that “it is not necessarily true that the poor can’t afford certain essential purchases such as mosquito nets or school fees, instead funds that could have been spent on those essential items are instead funneled away to less than virtuous items such as alcohol, tobacco, or gambling.”

It is more important to design ways of using money pragmatically, and higher taxes on ‘temptation’ could be a viable alternative. However, critics argue that sin taxes are regressive as the poor pay a more significant share of their income and empower the state with the unnecessary moral authority to dictate what citizens should and should not be doing.

The writer teaches at BRAC University and BIDS as an adjunct Faculty in the Master’s Program in Economics. He can be contacted at mirobaidurr7@gmail.com.