Review alcohol 'sin tax' but not for tobacco

The 2014 Singapore Budget provides for substantial increases in the so-called "sin taxes" on cigarettes and alcoholic drinks, with alcoholic drinks being affected the most.

Taxes for cigarettes and tobacco products have been raised by 10 per cent, while alcohol duties have gone up by 25 per cent. These additional duties are expected to increase government revenues by about S$190 million a year.

Cigarettes and alcohol have long been subjected to sin taxes in order to limit excessive consumption of undesirable goods, usually on health grounds.

However, we believe that an important distinction should be made between cigarettes and alcohol consumption. This is consistent with recent health findings on alcohol consumption.

We have no qualms about heavy taxes on cigarettes due to clearly demonstrated detrimental health effects of smoking. There are the ill effects from exposure to second-hand smoke, which is found to be associated with diseases like lung cancer, ischemic heart disease, asthma attacks, childhood respiratory disease and sudden infant death syndrome. Smoking also imposes huge cost on society.

This includes direct medical costs incurred due to smoking- related diseases, and the indirect costs of lost production due to treatment of smoking-related diseases and death. A 1997 study published in the Singapore Medical Journal in 2002 estimated that smoking cost the Singapore economy around S$839 million annually.

Given the well-documented negative health effects of smoking and the high cost imposed on society, high cigarette taxes seem to be justified.

Research even shows that an increase in cigarette taxes makes smokers happier. In Canada and the United States, it was found that higher cigarette taxes are associated with a large increase in self-reported well-being, presumably because higher taxes serve as an invaluable self-control device for smokers intending to quit.

In the case of alcohol, things are not so straightforward.

Alcoholism and binge drinking can have wide-ranging health and social effects. But studies show that the moderate consumption of alcohol, red wine in particular, is likely to be beneficial to health.

Indeed, research by Dr Matrinette Streppel, of the National Institute for Public Health and Environment, Netherlands, has shown that moderate drinkers of any form of alcohol are less likely to develop an array of disorders that may lead to heart disease and diabetes.

There is also suggestive evidence that the antioxidant resveratrol present in red wine has anti-cancer properties.

Other studies even indicate the potential for red wine to protect against Alzheimer's disease.

With increasing public acceptance of such findings, many countries have, in fact, reduced taxes on alcohol.

Hong Kong even abolished the duty rate of all alcohol with strength less than 30 per cent by volume effective from Feb 27, 2008.

Singapore's 25 per cent increase in alcohol taxes seems to go against this trend, disregarding the potential health benefits.

However, research in Finland in 2004 showed an increase in alcohol-related mortality and hospitalisation after such tax reductions.

This poses a dilemma for public policy. We do not want to discourage moderate drinking, but heavy drinking. Instead of an across-the-board increase in alcohol taxes, perhaps it is more appropriate to focus on the issue of heavy drinking.

One way to discourage heavy drinking is to shift from taxing alcohol according to value (ad valorem) to a volumetric one based on alcoholic content.

World-wide, there has been such a shift. In Australia, wines are taxed ad valorem but other alcoholic drinks are taxed by volume.

Alcoholic drinks, especially very expensive wines, also have an element of conspicuous consumption.

This involves showing off to others, creating envy and wasteful competitive behaviour. Higher taxes on these goods may therefore be justified.

Expensive wines are also to some degree a "diamond good".

Such goods are sought after for their value instead of solely for their intrinsic consumption effects. Expensive wines are valued simply because they are more expensive.

To the extent that this is true, higher taxes increase revenues for the government but not at the expense of consumers and producers.

Such diamond goods should therefore be taxed heavily purely on efficiency grounds.

Perhaps alcoholic drinks should be taxed both on their alcoholic content and on their value.

Such a combined tax may achieve an appropriate compromise.

It could raise revenues efficiently while discouraging heavy drinking and not place moderate drinkers at a serious disadvantage.

The considerations that determine the tax to be levied on alcohol should be different from that of cigarettes, due to the distinct implications of alcohol consumption.

It is not correct to categorise both as vices.

The first writer is professor and head of economics at Nanyang Technological University. He is also president of the Economic Society of Singapore. The second writer is Winsemius professor of economics, Nanyang Technological University.

This article was first published on JULY 4, 2014.
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