To avoid any confusion or misunderstanding, the focus of this column is not on taxes on those among us who could be considered overweight, but on taxing that which is externality induced, including excessive accumulation of body fat. In essence, the suggestion is to tax that which induces a negative externality on consumers.

The taxes apply to two primary goods – one of which has been called the ‘next tobacco’ by celebrity chef Jamie Oliver and the other ‘white death’ or the ‘slow silent killer’.

The ‘next tobacco’ is sugar, for which http://authoritynutrition.com provides ten compelling reasons why you should avoid it. These are the facts that added sugar contains no essential nutrients and is bad for your teeth; added sugar is high in fructose, which can overload your liver; overloading the liver with fructose can cause nonalcoholic fatty liver disease; sugar can cause insulin resistance, a stepping stone towards metabolic syndrome and diabetes; the insulin resistance can progress to Type II diabetes; sugar can cause cancer; owing to its effects on hormones and the brain, sugar has unique fat-promoting effects; because it causes massive dopamine release in the brain, sugar is highly addictive; sugar is a leading contributor to obesity in both children and adults; and it ain’t the fat – it’s sugar – that raises cholesterol levels and causes heart disease.

As for salt, the ‘white death’, or the ‘slow silent killer’, http://www.actiononsalt.org.uk, contends that salt increases blood pressure. Increased blood pressure (hypertension) is the major cause of strokes, heart failure and heart attacks, the leading causes of death and disability in the UK. Apparently, there is also increasing evidence of a link between high salt intake and stomach cancer, osteoporosis, obesity, kidney stones, kidney disease, vascular dementia, and water retention and salt can also exacerbate the symptoms of asthma.

In recent columns, I discussed the application of customs taxes and excise taxes (this naming convention is inclusive of duties and levies) to redress negative externalities. The most obvious domain for a customs tax and an excise tax is that of ‘sin taxes’.

A ‘sin tax’ is a tax levied on certain goods deemed to be harmful to society, such as alcohol and tobacco, candies (sweets), soft drinks, fast foods and coffee. Sin taxes are levied to directly pay for the damage inflicted on society through the consumption of these goods, and to increase the price of the targeted goods in an attempt 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. Due 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.

As detailed in earlier columns, ‘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 which 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 the collection of 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.

In response to this proposition, there might well be a lobby that would argue that the imposition of ‘fat taxes’ would render the sugar and salt industries uncompetitive, which, in turn, would impede employment opportunities.

However, consideration should also be given to the fact that it is uncontested that both these industries impose negative externalities on society, for which they offer no form of reparation. Should industries be permitted to transfer the cost of their created externalities on to the consumer? In essence, consumers of these goods will, in all likelihood, incur additional costs in future which are not catered for by the initial price of the good and the consumer will not be able to seek recourse from the producer. The future costs will then be borne by the consumer and quite possibly by government, which itself derives its financial resource through taxation. This would mean that government would need to direct its taxation revenues generated from other sources of economic activity to address an externality created by another economic activity. This hardly seems fair or equitable.

Consideration should be given to Sir Isaac Newton’s third law of motion (action-reaction law) – Philosophiae Naturalis Principia Mathematica (1686) – which asserts that, ‘for every action, there is an equal and opposite reaction’.

The single concern that one might have with the imposition of ‘fat taxes’ in South Africa is that externality generated revenue tends not to be ringfenced. This implies that the revenue collected is not earmarked to redress a certain negative externality; rather, it forms part of the overall total tax revenue. In the instance of ‘fat taxes,’ it would be an imperative that does not become a fiscal measure, but that it is utilised to effect behavioural change.