Are sin taxes reflective of all ‘sins’

29th May 2015

  

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When I wrote the column entitled ‘Plastic bag levy – who derives the benefit?’, for the April 17 edition, on one of the lesser known ‘contra duties’ (‘contra’ means against or opposite) administered by the South African Revenue Service (Sars), it was not my intention for that comlun to be the first in a series.

However, owing to the interest the column sparked, ‘Are luxury taxes still relevant?’ followed on May 15 and ‘Environmental levies – fiscal or behavioural lntent?’ on May 22. These are, interestingly, not the only contra duties. The phrase immortalised in infomercials, “but wait, there is more”, is apt in the context of these duties. Subsequent to this column, a conclusive column will appear.

This column focuses on ‘sin taxes’, and readers of this column should be familiar with these, since the Minister of Finance mentions them in every Budget speech. How long the Minister will be able to continue increasing the rate of ‘sin taxes’ is another matter. There are a few reasons for mentioning this, the first being the infamous Laffer curve, which contemplates the relationship between economic activity and the rate of taxation, suggesting that there is an optimum tax rate which maximises tax revenue. Another consideration is the substitutability of the good, which could result in serious health and safety risks. Further, an increase in the rate of sin taxes also incentivises illicit trade, simply owing to the attractive profit margins created by the rate of sin taxes. But I digress.

You might well know the most prevalent of the goods that are considered to be ‘sin goods’, but perhaps not all of them. Which begs the question: What constitutes a sin?

A sin is generally considered to be an immoral act, a transgression of a divine (natural) law. Some people consider their sin to rather be a vice, which is generally a practice, behaviour or habit considered to be depraved or degrading. A vice is usually associated with a flaw in a person’s character or temperament rather than his or her morality. A prime example is smoking.

Let us now consider the duty dispensation in South Africa. My quest to establish the exact date of the imposition of present-day specific excise duties (the removal of the distinction between specific excise duties and specific customs duties was announced on August 3, 2012, with retrospective effect to April 1, 2012) has been less than successful. However, it is safe to assume that it predates the contra duties as specific excise duties, which were first introduced in the Cape province, part of present-day South Africa, in 1678 (refer to the column published on February 20, 2009).

Looking beyond the terminology of duty, tax and levy, as with the ‘non-essential’ taxes or ‘luxury taxes’, here too the status of ‘excise duty’ is conferred on both imported goods and locally manufactured goods.

So, what constitutes present-day sin goods? The very broad categories includes liquors (wine – fortified and unfortified; other fermented beverages; undenaturated ethyl alcohol; spirits); cigars; cigarettes; tobacco; smoking tobacco; petroleum and oils; halogenated derivatives of hydrocarbons (chemicals); and biodiesel.

As far as you are concerned, are there any obvious sin goods absent from the list? Well, some years ago, soda drinks (also known as fizzy drinks or carbonated beverages) were on the list owing to health considerations, besides other reasons – essentially owing to their sugar content. Strangely enough, sugar as a good has never made it onto the list. A good from the continent which features predominantly is cement, while internationally candies and sweets are excluded.

In a pure economic sense, a sin tax is considered a kind of sumptuary tax, which implies that it attempts to regulate or reduce the consumption of goods that society considers undesirable. In addition, a sin tax is, essentially, a Pigouvian tax in that it is applied to a good that generates negative externalities (external costs). This is despite the fact that certain individuals might argue that their personality and temperament improve with increased consumption of alcoholic beverages and other sin goods.

The goods on which a sin tax is imposed evidently have a common denominator, namely that the elasticity of demand is inelastic, if not nearly perfectly inelastic. This simply means that there are little, if any, substitutes for the product; thus, if there is an increase in the price of the good, the quantity demanded will reduce only marginally, if it reduces at all. In addition, a sin tax is a regressive tax by nature, discriminating against lower-income earners, since the tax does not account for the ability to pay. This means less fortunate individuals pay a greater amount of their income as a sin tax.

As mentioned at the outset, our Finance Ministers have continued the practice of increasing the rate of sin taxes every year. As for how long this practice will and can continue is another matter. The intention of the imposition of sin taxes is, essentially, to internalise an external cost.

However, a case can be made that, generally, the imposed rate of sin tax is in excess of the external cost, resulting in an over-recovery of tax revenue. Then, this tax revenue should be ringfenced and be specifically employed to remedy a given external cost.

The question to ask about South Africa’s sin taxes is: What is the intent? They are a fiscal measure? In other words, their intention is to generate revenue or change or at least attempt to change behaviour? In South Africa, the revenue is not ringfenced. Although sin taxes generated R32-billion in 2014/15 (R12.2-billion from cigarettes and R10.2-billion from beer), it is understood that these proceeds are deposited in the Southern African Customs Union (Sacu) National Revenue Fund (NRF) for redistribution among its member countries. At the very least, this could be remedied by simply amending the terminology from ‘specific excise duty’ to ‘specific excise levy’, since a levy does not form part of the Sacu NRF.

Portland Cement – Provisional Payment
On May 15, Sars informed of the imposition of provisional antidumping duties on Portland cement imported from or originating in Pakistan. The provisional payments were imposed up to and including November 13.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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