The Design of Effective Health Taxes

Lisa M Powell and Frank J Chaloupka

Chapter 9 in Health Taxes:Policy and Practice, 2023, pp 265-294 from World Scientific Publishing Co. Pte. Ltd.

Abstract: To maximise the effectiveness of health taxes in reducing consumption of tobacco, alcoholic beverages, and sugar-sweetened beverages (SSBs), the tax design must be considered. We study tax aspects including determining tax type (i.e., ad valorem, specific excise, sales, and import taxes), what products are going to be taxed (i.e., the tax base), tax structure, tax rate to be applied, and implications related to tax revenue and earmarking. We find that excise taxes, often used as ‘Pigouvian’ taxes, are preferable to correct for externalities from harmful consumption. We note numerous advantages of specific (applied per unit of product) versus ad valorem (applied as percentage of price) excise taxes. We find that the narrower the product tax base, the greater the opportunities for consumers to substitute away from taxed to untaxed products, reducing the effectiveness of a tax in promoting health, while also generating lower revenues. Regarding the tax level, economic theory suggests that the tax should be set so that it generates revenues that are sufficient to cover the external costs associated with the harmful consumption of the taxed product. Regarding tax structure, tiered tax structures with higher rates based on higher levels of harm associated with products (i.e., ethanol or sugar) can help to reduce consumption of the most harmful products to a greater extent and help to encourage reformulation. Additionally, earmarking the revenues of increased taxes can be used to offset potential unintended consequences, and to augment the health impact through other initiatives that discourage use – i.e., for education campaigns or prevention programmes. Finally, the type and magnitude of tax employed, and extent of earmarking should be based on country-specific situational analyses of public health challenges and in the context of related public health goals, revenue needs and tax administration capacity of the country.

Keywords: Health Tax; Health Taxes; Tobacco Tax; Alcohol Tax; Sugary Drinks Tax; SSB Tax; Sugar-Sweetened Beverages Tax; Fiscal Policy; Health; Non-communicable Diseases; NCDs; Health Financing; Public Finance; Public Health (search for similar items in EconPapers)
JEL-codes: I1 I15 K32 (search for similar items in EconPapers)
Date: 2023
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