Tobacco Tax 2: Higher Tax + Corruption = Lower Revenue

(Note: this is my article for "People's Brigada News", June 4, 2010)

Out of the top 10 leading causes of morbidity (death) in the Philippines, about 6 are smoking-related, directly or indirectly. These are: acute lower RTI and pneumonia, bronchitis, influenza, hypertension, TB respiratory, and diseases of the heart.

And yet government does not seem to consider smoking as a major health issue. This is primarily because government collects several billions of pesos in tobacco taxes every year. Add to the fact that there is corruption in tobacco taxation, and a number of high government officials and legislators could be recipients of money from the tobacco industry so that certain loopholes and exemptions will be allowed.

Taxation is a tool by the state with two main objectives: To raise revenues, and to negatively influence or discourage, public consumption of a good or service that is being heavily taxed.

Thus, when government heavily taxes so-called "public bads" like tobacco and alcohol products (as opposed to subsidizing "public goods" like education and healthcare), government intends to achieve the dual purpose of taxation as mentioned above.

It looks simple to achieve those dual objectives. In reality though, in countries where there is weak enforcement of the rule of law, one or both purported objectives can be compromised. This is because the higher the taxes being imposed by the state, the higher will be the temptation of those being taxed to simply bribe state officials and tax bureaucrats so that they will pay lesser taxes and fees. So the actual result of high taxation of tobacco (and alcohol) products would be (a) to raise certain revenues and (b) propagate corruption in government.

If corruption will result in effective lower tax rate -- due to various exemptions and loopholes -- then retail price of tobacco products will remain low and hence, tobacco consumption will remain high. And more people will smoke. And public health problems directly or indirectly related to smoking will persist.

This scenario will pour cold water on relying on high taxation to discourage smoking. If this is so, what are the other alternatives?

Believers of individual liberty and free markets have strong belief in greater personal responsibility and lesser government responsibility. In this case, healthcare is first and foremost a personal and parental responsibility. Parents and guardians should teach their kids early that heavy smoking is bad. Individuals should realize that heavy smoking will kill them sooner than later. And if they get sick with dilapidated lungs and other internal organs, they should not run to the state to demand free or heavily subsidized healthcare because "health is a right". Not a logical move.

But persistent view that "health is a right" even for diseases that are lifestyle related will cloud our view and prod us to search for state-sponsored solutions like high taxation of tobacco and alcohol products. We may just end up propagating corruption in government, especially in the legislature where taxation of "public bads" are being discussed or killed, and in the internal revenue bureaucracies.

In view of this, government should send a clear signal to the public that it will cover only limited healthcare, like diseases affecting children, infectious diseases, and people with special health needs (physical and mental defect). Diseases due to unhealthy lifestyle – like those who regularly over-smoke, over-drink, over-eat, over-fight, live in dirty places, etc. – should not be covered with high taxpayers’ subsidy.

Government can compensate for this limited healthcare by encouraging – through less taxation, less intervention and regulation – of private and cooperative health insurance schemes. Those who are less responsible about their body should purchase a second or third health insurance, on top of government-owned PhilHealth insurance. This way, the financial burden when they get sick will be shouldered by them, their family or company, and not by the taxpayers at large.

Civil society groups that advance better public healthcare should also not fall into the trap of advocating more government solutions and intervention. Like lobbying for more government subsidies even for diseases that are lifestyle-related and self-inflicted. There are plenty of issues and concerns that are better left to individual, household and community decisions and should not be brought up as more “government responsibility.”

* See also, Tobacco Tax 1: Telecom and Medicine Taxes Too, September 15, 2009