The Preventative Health Taskforce has suggested a range of additional taxes to overcome the obesity crisis, the smoking crisis and the alcohol crisis. Let’s accept for a moment that there is a health crisis, despite Australians living longer, healthier and happier lives than ever before. Is taxation the solution?
Paying more money to the government is seldom, if ever, the solution to social problems — or any other problem. Yet there is a strand of vulgar economics that suggests that this is precisely the solution to all problems. To be fair, there is a theory in economics, associated with the great English economist Arthur Cecil Pigou, that suggests that if social costs are greater than social benefits that activity should be taxed, and if social benefits are greater than private benefits that activity should be subsidised.
The logic of this argument relates to downward sloping demand curves. As long as higher prices lead to less consumption, a tax on that activity will lead to less of it. This of course is one of the arguments against high rates of income tax — it undermines the work ethic. The important question is whether taxation is the best price signal that public policy can generate.
Let’s think about smoking tobacco. It is true that smoking has adverse health effects on smokers and non-smokers. This is well-known and has broad acceptance and understanding in the community and the incidence of smoking in the community has fallen dramatically in recent years. At the recent Henry Review Tax Conference Sijbren Cnossen made the argument that smokers pay for themselves. After you tally up all the additional taxes and consider reduced life expectancy and the like, smokers are not a net burden on society. In economic terms there is no smoking externality in equilibrium. To be sure non-smokers are not being compensated by smokers, but smokers have paid the government in full for their habit. Raising additional taxation on smokers is then just an exercise in revenue raising. There might be a case for that, but let’s not pretend this is a health measure.
In contrast to the hysteria over tobacco, alcohol abuse has far greater social costs associated with it. Alcohol abuse leads to all manner of anti-social and non-co-operative behaviour. It is not clear that drinkers pay the full social costs of their behaviour.
Does this mean that alcohol excise should be increased? Only if we believe that drinkers should pay for their anti-social behaviour in monetary terms. It is not clear that increasing the monetary cost of alcohol has a large impact on consumption. To the extent that it doesn’t, drinkers simply swell the coffers of the federal government while state government agencies clean up the mess.
Economists can calculate a monetary value of street brawls with the police and so on. But we don’t want to be compensated for urban violence — we want it to stop. Furthermore, many people would be doubtful that an economic estimate of these costs fully captures the human cost of anti-social behaviour. It can’t really be measured at a personal level. An increase in alcohol excise can only ever be used to heal the physical damage.
This is not to suggest that economics can’t offer a solution to anti-social behaviour. When the profit motive cannot operate well, there are bureaucratic solutions that can be employed. The education system is one such solution; government and community groups have undertaken massive education programs with some success. Another bureaucratic process is the criminal justice system. This, too, raises the price of anti-social behaviour but does not swell the coffers of government. So far the authorities have targeted venues — raising the price of liquor licences across the country. But unless these licence increases directly translate into more police resources, such a measure will be little more than punitive. Increased taxation of alcohol itself, and by implication increased health spending, may benefit the medical profession but it is not clear it will solve the social problems associated with alcohol abuse.
Sinclair Davidson is a professor in the School of Economics, Finance and Marketing at RMIT University and a senior Fellow at the Institute of Public Affairs.
Sinclair, you are in complete self-contradiction here, though at least you’re more coherent than your colleague Tim Wilson.
In the first half of this article you argue that smokers are paying for their cost to society, their lives, and the lives of others, in monetary terms.
In the second half, you argue that drinking shouldn’t be taxed, because we don’t want to be compensated for the damage caused by alcohol, e.g. increased urban violence, in monetary terms, “we want it to stop”.
Why shouldn’t the same apply to dying of lung cancer? It may be nice for a hypothetical smoker dying of lung cancer to know that he has paid in full for the cost of his health care, his lost productivity, the damage caused to those around him through secondhand smoke, but I suspect he would prefer not to die. Just as most of us would prefer less street violence to receiving compensation for it afterwards.
As you say, “many people would be doubtful that an economic estimate of these costs fully captures the human cost of anti-social behaviour [or, for that matter, the human cost of having one’s self, one’s loved ones, friends and colleages die early of lung cancer]. It can’t really be measured at a personal level.”
If we don’t want people to die early, then we need to provide disincentives to risky, addictive behaviour, especially behaviour where the benefit is felt now and the cost later (something humans are extremely bad at assessing). Higher prices are one of the best disincentives there are to smoking, drinking and other risk behaviours.
Raising taxes on smoking and drinking is not “just a revenue raiser” but a way of saving lives. And if it raises revenues as well, revenues that can be used for better public services or to cut taxes that don’t create positive incentives (e.g. income tax, payroll tax, stamp duty), where’s the harm?
Seriously, two articles from the IPA on consecutive days decrying new taxes being levied upon the tobacco and alcohol industries?
“After you tally up all the additional taxes and consider reduced life expectancy and the like, smokers are not a net burden on society.”… “but smokers have paid the government in full for their habit.”
Not once do you mention the decline of tobacco use being correlated to increased taxes. Instead, you take a bizarre turn, seeming to suggest that it’s all good now that the government has balanced the taxes on cigarettes with the health cost of tobacco related illness.
Apart from being morally disgusting, it’s sloppy of you to state tobacco pays for itself without citing any empirical, peer reviewed evidence to back it up.
“In contrast to the hysteria over tobacco, alcohol abuse has far greater social costs associated with it.”
You’re drawing a very long bow by comparing the cost to the health system from tobacco related illness to the ‘social’ cost of alcohol abuse. You may as well have compared the price of fish in Shanghai to the entrance fees at Seaworld.
“It is not clear that drinkers pay the full social costs of their behaviour.”
“It is not clear that increasing the monetary cost of alcohol has a large impact on consumption.”
“Increased taxation of alcohol itself, and by implication increased health spending, may benefit the medical profession but it is not clear it will solve the social problems associated with alcohol abuse.”
If you are so uncertain about all of these things, perhaps you should do more research into the matter before claiming that there is no reason for increased taxation to dissuade alcohol abuse.
“When the profit motive cannot operate well, there are bureaucratic solutions that can be employed.”
For someone representing an alleged free market think-tank, I would have thought this statement a blasphemy. But it seems that the philosophy of your article revolves around blatant corporatism as opposed to free market ideology.
Jamesh: Do you work for an Ad Agency that’s just been given a couple of mil to brainwash us with those stupid anti-smoking ads on tv?
Some of what you said is logical, but….SMOKING DOES NOT CAUSE LUNG CANCER!!!
http://www.journaloftheoretics.com/Editorials/Vol-1/e1-4.htm
BTW…I don’t smoke either.
Raising additional taxation on smokers is then just an exercise in revenue raising
But also an exercise that will make the Prime Wowsers biggest fans happy. They get to look down on the people who smoke and or drink. If it was a health issue then we would be talking prohibition not taxation.
(((((Raising additional taxation on smokers is then just an exercise in revenue raising))))
Yes, …create the problem, even when it does n’t exist…then grab the moral high-ground and provide the fix. In this case the fix is increased and lopped-sided taxation which is always ruthless in servitude to the Sherrifs of Nottingham at the serfs expense.
((((But also an exercise that will make the Prime Wowsers biggest fans happy. They get to look down on the people who smoke and or drink. If it was a health issue then we would be talking prohibition not taxation.)))))
Yep!!…you got it.