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It used to be common knowledge that a spoonful of sugar helps the medicine go down – but times change. Once lyricised as an accessory to health, Britain has recently joined a number of nations that tax sugar in order to reduce its consumption and the obesity and health issues with which it is linked, and there are calls for the same in New Zealand. Taxes on sugar are the modern equivalent of taxes on tobacco.

The primary reason for taxation is to raise revenue for governments. Since it is an involuntary taking, revenue taxation should be ‘fair’, but ‘fairness’ is difficult to define. At a minimum, fairness suggests (as regards direct taxes such as income tax) that similar persons should be taxed similarly, and (in respect of indirect taxes such as GST) that similar products should be taxed consistently. This might seem to rule out discriminatory taxes on products such as tobacco or sugar.

However, revenue is not the only reason for a tax. Corrective taxes are intended to discourage harmful or socially dubious behaviours, or to address the perceived costs of certain activities such as smoking – or consuming too much sugar. Such taxes are more than a ‘nudge’, since they are supposed to alter behaviour in a fundamental way by altering economic incentives.

Corrective taxes raise many issues. There are questions about their effectiveness (do they change behaviour?) and equity (do they hit the poor hardest?). Corrective taxes also conflict with broad tax policy settings, are redolent of paternalism, and, as tobacco demonstrates, have an unclear historical precedent.

The tax policy goal of neutrality

New Zealand’s 1967 Tax Review Committee accepted that the tax system must be so designed that it can help achieve broad social objectives. However, a key tax policy goal in New Zealand since the election of the Third Labour Government in 1984 has been to minimise the behavioural effects of taxes in a quest for tax neutrality. Rather than promote broad social objectives, it is now understood that, ideally, taxation should not alter the allocation of resources or affect taxpayer behaviour. This quest for tax neutrality is consistent with the preferred broad-base, low-rate tax (BBLR) policy setting which underpins New Zealand tax policy.

Given this focus on neutrality, should there still be corrective taxes in today’s tax system? The 2001 Tax Review argued that specific excises and duties could not be justified on conventional tax policy grounds and recommended that they be discontinued. More recently, while upholding BBLR, the 2010 Tax Working Group dodged the question by ruling corrective taxes to be beyond scope.

Liberty or paternalism

Since taxation affects human behaviour, it also impinges on individual liberty. Neutral tax policy settings are consistent with current social norms that privilege individual freedom concerning lifestyle choices and life issues. In contrast, corrective taxes on consumption goods reflect an assessment that society should act to improve personal choices. Simply put, such taxes are paternalistic.

Contemporary social ethics (as well as neutral BBLR tax policy) reflect the anti-paternalistic stance famously promoted by John Stuart Mill. In his 1859 essay On Liberty, Mill claimed that, ‘over himself, over his own body and mind, the individual is sovereign.’ If so, compulsion, ‘either in the direct form or in that of pains and penalties for non-compliance, is no longer admissible as a means to [a person’s] own good, and justified only for the security of others.’ This would seem to rule out infringing a person’s liberty by taxing a product (such as sugar or tobacco) that harmed the individual only, since this would involve a third party imposing upon them a pain or penalty intended for their own good. Ergo, no corrective taxation.

However, Mill was no libertarian. Individuals must satisfy their legal and moral obligations to the state, and taxation is one such obligation. Since in his day indirect taxation provided a significant source of revenue, Mill conceded that the state could not avoid imposing penalties, which to some people might appear prohibitive, on some articles of consumption. On pragmatic grounds, Mill effectively classed what could be considered to be corrective taxes as revenue taxes. Such taxes might be unfair, but they were not illegitimate. Moreover, if tobacco or sugar were a luxury which the taxpayer could spare, their consumption might even indicate an ability to pay, which is a commonly accepted basis for revenue taxation, even in a BBLR tax system that aims for neutrality.

Mill also argued that his liberty principle only related to harm to self, and not harm to others. Where consumption gives rise to negative externalities, taxation could, in Pigouvian fashion, be a means to equalise the private benefit and the social cost of that activity. This is particularly so in a welfare state, where my sugar or tobacco consumption may result in your (the taxpayer’s) socially-funded health and dependency costs.

Mill further limited his liberty principle to human beings in the maturity of their faculties, and excluded those under age. This presents a danger, though: disagreement with a social belief (for instance, regarding cigarettes or cakes) could be taken as evidence of ignorance or immaturity, and justify intervention. Individual freedom can all too easily become identified with conformity to contemporary (but changeable) social norms and expectations.

Justifying corrective taxes

Corrective taxes trench on individual choice and would seem to be inconsistent with current tax policy settings. However, such taxes can be justified even on the basis of the writings of John Stuart Mill, the defender of liberty.

Shifting social opinion and knowledge provide shifting justifications for taxation, as is illustrated in the taxation of tobacco.

One of the earliest efforts to tax tobacco was by King James I of England. The king found that he could not ban a custom which he described as

lothsome to the eye, hatefull to the Nose, harmefull to the braine, dangerous to the Lungs, and in the blacke stinking fume thereof, neerest resembling the horrible Stigian smoke of the pit that is bottomelesse (1604).

So he taxed it, and upon becoming a British Colony in 1840, New Zealand followed suit. However, no reference was made to health concerns as the rationale for tobacco taxation; tobacco simply provided a productive source of revenue. Even when the tobacco tax was doubled in New Zealand’s infamous ‘black budget’ of 1958, health was not mentioned. The tax hike served the two-fold purpose of providing revenue for Government needs and of diminishing demand for imports.

It was not until 1970 that health was linked to tobacco taxation in a New Zealand government budget, a full six years after the United States’ Surgeon-General’s report confirmed a link between smoking and lung cancer. This health narrative morphed in later budgets:

  • from discouraging tobacco consumption as being likely to make a positive contribution to general health (1970);
  • to concern at the high level of public expenditure caused directly and indirectly by the consumption of tobacco (1977);
  • to the increasing social costs which consumption imposes on the community as a whole as well as on individual consumers (1979);
  • to conformity with international practice and pressure from people concerned about public health (1986); and
  • ultimately to the current goal of making New Zealand smoke-free by 2025 (2010), a goal reflecting a strongly paternalistic mindset.

The goals of corrective taxation

Tobacco taxation is inconsistent with current tax policy settings and lacks a clear philosophical basis. The history reveals different justifications over time. All in all, it provides an uncertain precedent for other corrective taxes – such as taxes on sugar.

The discussion on corrective taxation would become clearer if corrective taxes were named to reflect what they effectively are: penalties for a socially disapprobated activity, or user charges to reimburse society for the costs that the behaviour, such as smoking or consuming excessive sugar, causes. This would have the added benefit that the government would have to explain exactly what was being penalised, or the costs to which the charge related.

There is also a question as to why only some risky activities (tobacco or sugar consumption) and not others (sky-diving, swimming) are singled out for a government impost. It might even raise the fraught question as to whether the activities – smoking, or soft-drink drinking – should remain legal.

Regardless, perhaps Mary Poppins should consider updating her lyrics. Rather than advise her charges that:

A spoonful of sugar helps the medicine go down,

in the most delightful way!

the score might now read:

A spoonful of sugar causes doctors to frown,

so there must be tax to pay!

 

This article is based on Vosslamber, Rob (2017), ‘Taxing or penalising? Tobacco, obesity and taxation’, Journal of the Australasian Tax Teachers Association, 12:1.

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