Taxes and Tax Eexpenditures: Design and Outcomes
The following section describes various examples of the use of taxation directed at both consumers and producers. This section of the chapter also analyzes the design issues that are important in order to guarantee that these instruments contribute to achieving healthy fiscal policy.
Taxes on Consumers
Sales taxes—including excise taxes and value added taxes—and exemptions from those taxes are the most common fiscal policy tools used to influence consumers' health purchases. Examples are exempting medicines and foods from sales tax and imposing an excise tax on cigarettes and alcohol. Developed countries often use income tax incentives to provide deductions and credits for specific health care purchases. Box 11.1 discusses issues surrounding use of taxes for health.
[Box 11.1]
"Sin" Taxes on Tobacco and Alcohol
A wide range of countries and local jurisdictions have taxed tobacco, with acknowledged success in reducing consumption (P. Jha 1999). The health benefits of curbing the demand for cigarettes may go beyond eliminating the health consequences of smoking and secondhand smoke if consumer expenditures are diverted from cigarettes to healthier alternatives (for example, food).
Taxes on alcohol are widespread and are used primarily to raise revenue. Governments typically impose taxes at the producer, wholesale, and retail levels that are levied as a percentage of the sale price or are based on a flat amount per unit. Harmful alcohol consumption is controlled through prohibition, government monopolization of sales, "dry" days, restrictions on hours when sales are legal, restrictions on age and locations for sales and consumption, laws against drinking and driving, limits to alcohol content, laws against the sale of certain types of alcohol, and licensing.
Alcohol taxes do contribute revenue to government coffers in developing countries, generally in higher proportions than in developed countries (WHO 2002a), but smuggling and tax evasion are common. For example, Zimbabwe raised taxes on certain beers in 1995 but repealed the increase within months when tax revenues dropped significantly (WHO 2002a). Some developing countries have lowered alcohol taxes with consequent negative results. Mauritius experienced a dramatic increase in drunk-driving arrests, alcohol-related fatalities, and hospital admissions after it reduced taxes on alcohol (WHO 2002a). In sum, alcohol taxes do reduce drinking, but the evidence that such taxes are well targeted to those most at risk of problem drinking is not strong.
Food Taxes
The issue of taxing unhealthy foods has received increasing attention in the wake of the Global Strategy on Diet, Physical Activity, and Health, which was approved by member countries of the World Health Organization (WHO 2004). The global strategy points to the rising prevalence of obesity and overweight in developing countries, along with that of nutrition-related noncommunicable diseases, and recommends that countries consider fiscal policies and other measures to reduce those problems.
Governments can use excise taxes to reduce the consumption of unhealthy foods only if tax rates are sufficient to change consumption in a way that improves health outcomes, if they tax enough harmful foods or food ingredients, and if they levy the taxes in an effective manner. Guo and others' (1999) study in China demonstrates significant potential for price changes to affect consumption. The researchers studied dietary intake in a sample of urban and rural Chinese households and show that a 10 percent increase in the price of pork potentially reduces fat consumption by 8 percent. Energy and protein intake would both drop by 2 percent. The overall effect may be different for the poor and the rich. The potentially harmful effects on the poor of increasing the price of pork would be buffered by substitutions from other food groups, such as oil, wheat flour, and coarse grains, but concerns remain that overall nutrition would worsen. These results suggest that using price changes to alter dietary intake in a setting where overnutrition and undernutrition coexist may have mixed outcomes.
A natural experiment in Poland during the economic downturn of the 1990s suggests a beneficial role for price policy in a consumer switch from animal fats to vegetable fats with lower amounts of trans fatty acids (Zatonski, McMichael, and Powles 1998). A dramatic decline in ischemic heart disease and related circulatory system diseases during the first half of the 1990s is most easily explained by the removal of consumer subsidies from foods of animal origin, the aggressive marketing of margarines, and a general decline in food purchasing power. The major change in the food supply appeared to be a reduction in foods containing animal fats; however, no direct relationship can be conclusively attributed without further study of the Polish experience and the experiences of other countries undergoing similar transitions.
Governments may choose to address food-related health problems by taxing imports of high-fat or high-sugar food; however, such efforts conflict with rules governing international trade. Fiji, for example, tried to ban the import of mutton flaps, an extremely fatty food that was contributing to the country's obesity problem. To comply with its World Trade Organization obligations, Fiji had to ban the sale of all mutton flaps, not just imports (Evans and others 2001). One analysis suggests that the same kind of broad treatment would be necessary to grant subsidies to healthy foods, but taxing unhealthy domestic foods alone would probably not pose a problem under World Trade Organization rules (WHO 2003). Furthermore, avenues for using other regulatory and economic policies to improve the consumption of healthy foods may be acceptable under the World Trade Organization Agreement on Technical Barriers to Trade and the Agreement on Agriculture if countries can justify them as contributing to legitimate national health objectives.
Agricultural policies affect food prices, food choices, and farm incomes in addition to the food security of both rural and urban populations. Each country must assess the potential for reorienting its agricultural policies so as to produce a healthier food supply. Developing countries are generally more likely to directly subsidize food consumption than food production; however, they frequently make indirect subsidies available through the provision of cheap fuel, chemical inputs, water, and loans to the agriculture sector. These policies may be environmentally and fiscally costly and rarely contribute to improved population health.
Research is needed on individual countries' agricultural policies and food supply needs to make them more compatible (Nugent 2004). At the same time, the dynamics of food choice and the effects of price manipulation need to be better understood before tax and subsidy systems can be designed to effectively promote healthy food choices.
Sales Tax Exemptions on Healthy and Staple Foods and Medicines and Other Health Care Goods
Governments may set tax policies to ensure that certain expenditures on health-related behaviors and health goods are tax deductible or tax exempt for firms, employers, or individuals. Exemptions should apply to a limited number of goods that are easily differentiated from goods that are not exempted. Note that in countries with large informal sectors, income tax systems are weak, and fiscal policies for the deductibility of credits are unlikely to be effective.
South Africa provided value added tax exemptions for a short list of essential foods and found a varied consumption pattern by commodity, with the poor receiving most of the benefits of the maize exemption, but few of the benefits of the milk exemption (Alderman and del Ninno 1999).
Mexico imposes a 15 percent value added tax on almost all goods. Exemptions include medicines, physician's services, and some foods. Recently, a government proposal to make drug and food purchases eligible for value added tax and to channel the resulting revenues into financing programs targeted to the poor has given rise to extensive debate. Those in favor have argued that the existing subsidy is regressive because most drug and food purchases are by the wealthy (Fundacion Mexicana para la Salud 2001).
Many developing countries concerned about the spread of HIV/AIDS have dropped import taxes on condoms, but others continue to impose tariffs on imports. For example, Malaysia is a major producer and imposes a 25 percent tax on imports. Brazil used to impose both an import tax and a distribution tax that amounted to a total of 45 percent of the original condom price, but it granted a permanent sales tax exemption when condom sales increased following a temporary tax holiday.
Taxes on Producers
Producer taxes are usually aimed at discouraging socially harmful products or processes. They can be imposed either on the use of certain inputs, such as more heavily polluting fuels, or on their outputs, such as emissions of air pollutants.
Theoretical and simulation models have examined the use of taxes on fuels and emissions taxes to control air pollution (World Bank 1994a, 1994b), but empirical data are lacking. Models of taxes suggest potential to induce substitution by cleaner fuels and reductions in overall energy use, but actual results will depend on the availability of fuel substitutes within countries. Data on Chilean manufacturing support the possibility of clean fuels substitution but indicate the likelihood of uneven sectoral incidence of the emissions tax. For example, bakeries were responsive to changes in relative prices, whereas metal products plants were unresponsive, and meat packers were unable to adjust their electricity demand but could reduce energy from other sources (World Bank 1994b). If this potential were realized on a global or regional basis—for example, through agreements to the Kyoto Protocol—a double benefit of reducing harmful externalities and raising significant revenues might be achieved.
