Undercover Economist

These are the sins we should be taxing

‘The UK already relies more than most rich countries on fuel, alcohol and tobacco duties’

Is it time to rethink the way we tax sin? The UK has long levied special taxes — “duties” — on products that pollute the environment, the lungs, the liver or the pocketbook: driving, flying, tobacco, alcohol and gambling. There are good reasons for these taxes. The government must raise revenue somehow, so there is much to be said for taxing products that are price-insensitive, socially harmful or, at the very least, unhealthy temptations.

But the way sin taxes are levied in practice is an incoherent muddle. Plenty of products that are bad for us (bacon, butter, sugar) get favourable tax treatment, attracting no value-added tax, although the standard VAT rate is 20 per cent. Heating and lighting our homes also attracts a concessional rate of tax, although a kilogram of carbon dioxide emitted from a power station or a gas boiler contributes to climate change just as much as a kilogram emitted from a car. Vehicle excise duty is a tax not on driving but on owning a car. And the rate of duty on alcohol varies depending on how we drink it.

It is easy to see how successive chancellors bodged their way to this point. Taxes on the pint or at the pump are eye-catching; raising them seems morally serious but cutting them is a crowd-pleaser. And so they bounce around like the political football they are.

George Osborne has an opportunity to fix the situation this Wednesday during his Budget speech. Here’s what he should do.

First, similar harms should attract similar taxes. The UK duty on 10ml of pure alcohol, roughly the amount in a shot of vodka or half a pint of beer, varies wildly. It is about 7p in strong cider, 18p in strong beer, or 28p in whisky and wine. A consistent price per millilitre would make more sense.

Second, he should broaden the sin tax base. UK duties are concentrated on tobacco, motor fuel and alcohol. As the Institute for Fiscal Studies showed in its “green budget” in February, revenue from duties has been falling for decades, from 4.1 per cent of national income in the early 1980s to 2.6 per cent last year. This drop is the net result of falling duties on fuel (back to the levels of 20 years ago in real terms), declining duties on alcohol and lower consumption of both tobacco and alcohol.

Should the chancellor, then, raise duties? Perhaps, but there are limits. The UK already relies more than most rich countries on fuel, alcohol and tobacco duties. Above a certain level, the smugglers and bootleggers take over.

A wiser approach is to tax sins that have thus far escaped attention. The most obvious is congestion: fuel taxes do not distinguish between driving along an uncongested country road and driving in rush-hour in a built-up area, which causes vastly more social harm. Congestion charges, which are now technically feasible, are fair and efficient, if the political case can be made.

Another obvious sin is sugar. While one can be too puritanical about nudging people to take care of their health and waistline, it seems strange that perfectly reasonable activities such as buying a T-shirt or earning a living attract tax, while sugar is tax-free. A sugar tax of a half-penny a gram would add about 18p to the cost of a can of Coke, more than that to a family pack of Bran Flakes, 25p to a 200ml bottle of ketchup and 45p to the price of a packet of chocolate digestives.

Third, Osborne should avoid arbitrary cut-offs where possible. In a bygone age it must have been simpler to slap a tax on an item in a particular category but this has led to the infamous “Jaffa Cake” problem. Are Jaffa Cakes — sponge discs with an orange jelly topping, partly coated in chocolate — cakes (zero VAT) or biscuits (VAT at 20 per cent)? A tribunal in 1991 mused that Jaffa Cakes are packaged much like biscuits, are sold next to biscuits, are the same size and shape as biscuits and, like biscuits, are eaten without a fork. However, it also noted that they are made of a cake-like dough, are soft and, like a cake, they go harder when stale. The tribunal eventually concluded that Jaffa Cakes are cakes, and thus they remain tax-advantaged, even as they nestle on the supermarket shelves next to their biscuitish rivals.

All of this is nonsense from any angle. In discouraging unhealthy eating, the relevant issue should not be whether food is circular or requires a fork but how much sugar, salt and saturated fat it contains. Sugar can be measured and taxed by the gram, whether it comes dissolved in oft-demonised soft drinks or added to bread, cereal, ready-meals, chocolate bars or anything else.

Finally, we should not worry too much about the distributional consequences of sin taxes. This isn’t because distribution doesn’t matter — it does. But, by some measures at least, alcohol and fuel duties hit the middle classes harder than they hit the poor. In any case, there are better ways to deal with inequality than by cutting sin taxes. People on low incomes need support but that help is better provided through tax credits, child benefit or good public services rather than cheap booze, sweets and tobacco. We are all free to buy vodka and cigarettes. Yet trying to make them cheaper would be a strange way to address social injustice.

Written for and first published at ft.com.

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