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It’s back to the future as Gordhan announces tax on sweetened drinks

18th March 2016

By: Riaan de Lange

  

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It’s time for the fat taxes’, read the headline of the instalment of this column published on July 17, 2015, in which I discussed the taxation of two externality-inducing goods, both of which are primary goods – one of these has been called the ‘next tobacco’ and the other ‘white death’ or the ‘slow, silent killer’.

The ‘next tobacco’ is sugar. The website http://authoritynutrition.com provides ten compelling reasons why you should avoid it. The ‘white death’ or ‘slow, silent killer’ is salt, which, according to http://www.actiononsalt.org.uk, increases blood pressure, the major cause of stroke, heart failure and heart attack.

To recap, ‘sin taxes’ are levied to directly pay for the damage inflicted on society when these goods are consumed, and to increase the price of the targeted goods in order to reduce their attraction and use. Direct ‘sin taxes’ are aimed at generating revenue (fiscal measure) and redirecting the revenue generated to compensate for the negative externality, as well as effecting behavioural change.

Owing to the addictive nature of the goods, and as a consequence of the near-perfect inelastic demand for them, the preferred remedy seems to be an increase in the rate of taxation. ‘Sin taxes’ are considered to be both Pigovian (Pigouvian) taxes and sumptuary taxes. A Pigovian tax is a tax applied to correct a market activity that is generating negative externalities. ‘Sin taxes’ are also considered to be sumptuary taxes, as their intention is to reduce transactions that society considers undesirable. As with Pigovian taxes, their imposition serves to mitigate the use of these goods.

The proposition is for the imposition of fat taxes on sugar and salt rather than on goods of which these substances are ingredients. In essence, similar to the liquor and tobacco industries, these will be a tax at source or a duty at source. The reasoning is fairly obvious: the administration of the taxes will be simplified in that it is not concerned with the array of other goods in which it is used in production. The cost of collecting the taxes will, thus, be greatly reduced as they will be very easy to administer. An added advantage will be that, in both industries, there is a manageable number of companies, and production tends to be confined to certain areas or regions.

On page 16 of the 2016 Budget speech, which he delivered on February 24, Finance Minister Pravin Gordhan merely mentions the “introduction of a tax on sugar-sweetened beverages”. However, in Chapter 4 of the National Budget Review, on page 52 and under the headline ‘Promoting public health and social wellbeing’ and under the subheading ‘Taxing sugar-sweetened beverages’, Gordhan provides more details, stating: “Obesity stemming from overconsumption of sugar is a global concern. Over the past 30 years, the problem has grown in South Africa, which has the worst obesity ranking in sub-Saharan Africa, and led to greater risk of heart disease, diabetes and cancer. The Department of Health has published a policy paper on the growing problem of obesity. Fiscal interventions such as taxes are increasingly recognised as complementary tools to help tackle this epidemic. Countries such as Denmark, Finland, France, Hungary, Ireland, Mexico and Norway have levied taxes on sugar-sweetened beverages. Government proposes to introduce such a tax on April 1, 2017, to help reduce excessive sugar intake.”

This led to an array of business media headlines, such as ‘Gordhan announces sugar tax’, ‘Will a sugar tax trim the fat off South Africans?’, ‘The secret’s out – SA to get a sugar tax’ and ‘SUGAR TAX: Deterrent likely to be met by bitter opposition’. But here is the thing – what is to be imposed is not a sugar tax. No, it is not a tax on sugar; it is a tax on sugar-sweetened beverages, and yes, there is a difference – a big difference. Though not defined, it is understood that sugar- sweetened beverages include soft drinks, fruit drinks (but not all), iced tea, and energy and vitamin water drinks.

The thing with not taxing the primary product at its origin, but rather an end product, is that you discriminate against that specific end product. So, other products that use sugar as an ingredient are not subject to taxation. Also, by imposing a tax on sugar-sweetened beverages, you might well incentivise the less affluent consumer to change to alternative beverages that might contain sugar substitutes, such as aspartame, cyclamate, saccharin, stevia, sucralose, acesulfame potassium, lead acetate and mogrosides. As a matter of interest, an article in National Geo- graphic groups sugar substitutes into four general categories, namely artificial sweeteners, sugar alcohols, natural sweeteners and dietary supplements.

So, how healthy an alternative are they? An October 7, 2013, article, ‘Sugar Substitutes – What’s Safe and What’s Not’, states, under the headline ‘The Case Against Artificial Sweeteners’: “Sweetener lesson 101: Avoid artificial sweeteners like the plague. While the mechanisms of harm may differ, they’re all harmful in one way or another. This includes aspartame, sucralose, saccharin, acesulfame potassium, neotame, and others. Aspartame is perhaps the most dangerous of the bunch. At least it’s one of the most widely used and has the most reports of adverse effects. There are also hundreds of scientific studies demonstrating its harmful effects.” According to Michael F Jacobson, executive director of the Center for Science in the Public Interest, “aspartame has been found to cause cancer – leukemia, lymphoma, and other tumors.”

Something that you may, or may not, recall is that, during the 1990s and early 2000s, South Africa did, in fact, levy a specific customs duty and a specific excise duty – also known as ‘sin taxes’ – on soft drinks. Then, on page 23 of his Budget speech of February 20, 2002, the then Finance Minister stated: “Government has steadily reduced excise duties on soft drinks over the last four years. It is proposed to abolish the remaining 6c/ℓ duty. The estimated revenue loss will amount to R135-million. On page 89 in Chapter 4 of the ‘National Budget Review’, he stated, under the headline ‘Duty on soft drinks and mineral water’: “The excise duties on soft drinks have been scaled down over the last four years. The duties will be abolished with effect from April 1, 2002. The estimated revenue loss will amount to R135-million.” The sin taxes on soft drinks were abolished on February 20, 2002. (It would be interesting to know the tax revenue that this tax was expected to yield, and whether it would be ringfenced – in other words, applied to remedy an externality.)

All this reminds me of the tagline of the1989 Back to the Future II movie: “Synchronize your watches. The Future is coming . . . BACK.”

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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