BWorld 218, Tobacco taxation, smuggling and plain packaging

* This is my column in BusinessWorld on June 04, 2018.

“To cease smoking is the easiest thing I ever did, I ought to know because I’ve done it a thousand times.” — Mark Twain

On May 29, 2018, I attended the “Health for Juan and Juana” conference on universal health care (UHC) at the PICC, jointly sponsored by the DoH, ADB, PHAP, MeTA, Havas, AC Health, others.

It was a big event with many participants and high-powered speakers and facilitators from national and local governments, multilaterals, NGOs, academe and private players.

Listening to the health officials of Davao, Makati, Bataan, and South Cotabato, I got the impression that with the way they provide health care to their constituents, it is possible to abolish the DoH and realign its budget to LGUs.

The keynote speaker was Sen. JV Ejercito, Chairman of the Senate Committee on Health and Demography and he talked about his UHC bill, the public consultations, the financing including his proposal to further hike tobacco tax to P90/pack. It is a far-out number compared with P30/pack in 2017 under Sin Tax law of 2012 (RA 10351), to become P35/pack in 2018, P37.50 in 2019, then P40/pack in 2022 under TRAIN law (RA 10963).

Since corruption in government remains high, higher tax rates mean higher tax avoidance. Lots of cigarette smuggling occurred in 2015-2016 involving billions of pesos of avoided taxes. In February 2017 for instance, the Bureau of Customs estimated that some P50B of foregone taxes in 2016 were due to smuggling, about P16B of it was from cigarette smuggling.

If the numbers are correct and if we divide P16B over P29/pack excise tax in 2016, that was equivalent to 552 million packs of cheap cigarettes. Cheap cigarettes encourage more smoking and, as a result, higher tobacco taxes achieve an opposite result.

With higher tobacco tax this year because of TRAIN law, cigarette smuggling has continued.

For instance, a BusinessWorld report on May 01, 2018 said “DoF warns cigarette smuggling may be helping finance terrorism.”

DoF Secretary Sonny Dominguez was quoted, “Illegal money can end up funding terrorist activities” while Customs Commissioner Caesar Dulay said that “smuggled cigarettes are currently flooding the market.”

High taxation and explicit prohibitions are often two sides of the same coin. One policy done by governments abroad is the prohibition of displaying the tobacco companies’ names, logos, and brands via plain packaging policy. So all cigarette packs by all players, old and new, established or fly-by-night, will display similar designs and graphic warnings.

After implementing plain packaging policies since December 2012, illegal tobacco consumption in Australia has increased from an estimated 11.5% to 13.5% in 2012 to up to 15.0% in 2017 (source: KPMG, “Illicit Tobacco in Australia, Full Year 2017 Report,” April 20, 2018).

This because many new players, including those engaged in criminality and terrorism, have come in, produced cheap cigarettes since plain packaging is much easier to copy, and attracted more buyers and smokers.

The United Kingdom also enacted the plain packaging policy in May 2017 and after one year, (1) no significant decline in smoking incidence happened, partly or largely because (2) cheap counterfeit plain packs surfaced.

The counterfeits were found to have high tar, nicotine, and carbon monoxide than those allowed in UK, and in some cases, are found to contain heavy metals such as arsenic, cadmium, and lead, along with other toxic contaminants: asbestos, mold, dust, dead flies, rat droppings — and even human excrement. (Sources: The Times, “Illegal tobacco tainted by asbestos and rats,” May 16, 2017; Evening Standard, “Sniffer dogs with GoPro bodycams help uncover 30,000 fake cigarettes in Soho crackdown,” May 24, 2017).

Meanwhile, the World Justice Project (WJP) produces an annual study, the “Rule of Law Index” (RoLI) and score countries based on their performance on 8 factors and 44 sub-factors. The RoLI 2017-2018 Report involves more than 110,000 households as respondents and 3,000 expert surveyors in 113 countries and jurisdictions.

A summary is shown below, focused on Factor 6: Regulatory Enforcement (Government regulations are effectively enforced, applied and enforced without improper influence; Administrative proceedings are conducted without unreasonable delay, etc.)

So if Australia and the UK with better rule of law implementation have experienced high and rising incidence of illicit trade and smuggling of cheap cigarettes, how much more for developing countries like the Philippines?

If the Philippines will consider imposing higher tobacco taxes like the P90/pack proposal by Sen. Ejercito, and/or if it is to consider plain packaging policy, given its low rule of law culture and poor regulatory enforcement, a doubling of current extent of illicit trade and smuggling can be expected.

Which means more fake and cheap cigarettes will come in, and there will be more smoking and smokers, not less.

More government taxation and prohibitions create adverse selection problems; the law of unintended consequences always kicks in as nature abhors a vacuum.

Bienvenido S. Oplas, Jr. is President of Minimal Government Thinkers, a member-institute of Economic Freedom Network (EFN) Asia.

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See also:

BWorld 211, Intellectual property, innovation, and prosperity, May 20, 2018

BWorld 215, Urban mobility index and transport disruption, May 29, 2018 

BWorld 216, Positive and negative disruptions in the electricity market, May 31, 2018 

BWorld 217, Dutertenomics, TRAIN and high inflation, June 02, 2018

BWorld 195, Health alarmism in TRAIN sin tax hike

* This is my column in BusinessWorld last March 11, 2018.

“When a new source of taxation is found it never means, in practice, that the old source is abandoned. It merely means that the politicians have two ways of milking the taxpayer where they had one before.”

— H. L. Mencken, American journalist, satirist

As the public still has to adjust to the inflationary pressures of the new law called Tax Reform for Acceleration and Inclusion — Package 1 (TRAIN 1), TRAIN 2 is already in Congress. Among the targets are further tax hikes in “sin” products, and some NGOs that speak, write, and argue like government have been calling to further raise alcohol and tobacco taxes.

  

Such calls are based on certain premises and hypothesis like: (1) Philippines tobacco and alcohol consumption per capita is among the highest in Asia and the world; and, (2) the overall health of Filipinos is stagnating if not deteriorating because of high alcohol and tobacco use. Thus, consumption of sin product must be discouraged further via higher taxes plus other measures like graphic warnings.

How true are such premises and hence, how valid is the more-taxes-please measure as the purported solution?

The good news is that some basic data — like smoking incidence — are available and can be found at Our World in Data, a project of the University of Oxford. The bad news is that the data does not seem to support or corroborate those two premises and hypothesis (see table).

The numbers in the table show the following:

1. Philippines tobacco use as of 2012 was not that high and was lower than tobacco use of our richer and healthier neighbors like Japan and South Korea. Alcohol use in 2015 was lower than the global average of 6.3 liters per person per year.

2. Philippines life expectancy keeps rising, not falling or remaining steady, although it is among the lowest in the region.

3. People in countries with a high incidence of smoking also have high life expectancies. Brunei, Taiwan, South Korea, Japan, China, the Philippines, and Singapore have high cigarette use — at least 18 sticks per day per smoker in 2012 — and their life expectancy was at least 76 years in 2015 — except in the Philippines where it was only 68 years.

4. People in countries with low cigarette use (less than 12.5 sticks per smoker per day) also have low life expectancies of only 69 years or less.

These observations tend to contradict the two premises and hypothesis mentioned above. There are many possible explanations for this, two of which would be the following:

1. People in rich countries can afford to buy more tobacco and alcohol products despite the rise in prices due to rising sin taxes; and,

2. People in poorer countries consume “less tobacco” referring to the legal and branded products, but in reality, they consume “more tobacco” from illegal, illicit, and fake/counterfeit products and suppliers. And such consumption is not captured by official government data.

So the statement “more sin taxes = less alcohol and tobacco use” can be wrong.

Another possibility is that higher sin taxes can lead to more smuggling, more illicit trade of counterfeit products that are cheap and more affordable to more people, which can lead to more smoking and drinking.

Even rich and developed Australia, which has more strict regulations against tobacco use, has experienced a rise in cigarettes smuggling. In a KPMG report in March 2017 entitled “Illicit Tobacco in Australia, 2016 Full Year Report,” the estimated share of illicit and smuggled tobacco was 10.8% of total tobacco consumption, average for 2007-2012. This rose to 14% average for 2013-2016.

Instead of calling for higher sin tax rates, the government should focus on significantly controlling smuggled and illicit products that are cheap and readily available. This alone will significantly reduce the incidence of smoking and drinking.

Another compromise would be a rise in sin taxes but income tax rates (personal and corporate) and/or VAT rates should go further down. The people should be spared from government’s policy and mentality of endless tax hikes, regardless of administration.

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See also: 

BWorld 192, Cobalt mining and TRAIN, March 16, 2018
BWorld 193, TRAIN, inflation and emerging DOE price control, March 16, 2018 

BWorld 194, How ‘pro-labor’ policies work against labor, March 17, 2018

BWorld 161, The sin of smuggling and corruption in the Sin tax law

* This is my article in BusinessWorld last October 23, 2017.

The intent or purpose of higher taxation is to further penalize an act, work, or consumption, hoping to discourage them by making their prices higher while giving government and lobbyists more freebies and more money.

The unintended result of higher taxation is to encourage illicit trade, production of cheaper but lower quality goods and services while giving the corrupt and extortionists in government more money.

Such may be the experience of the Sin Tax law of 2012 or RA 10351. It has raised lots of money for government, benefitted the universal health care program of DoH-PhilHealth while enriching the smugglers, illicit traders and their government protectors.

Revenues from sin tax has significantly increased in 2013, the first year of implementation of the law. Tobacco tax in particular has more than doubled from P32B in 2012 to P70B in 2013. Meanwhile, estimates of cigarettes smuggling have also increased from 35 million packs in 2012 to 40 million packs in 2013 (see table).

The CRC estimates are partly derived from the Oxford Economics report in 2016, “Asia: Illicit Tobacco Indicators 2015.”

The rise in smuggling and illicit trade of cigarettes is also shown by the haul of the BoC and BIR in raids in November 2016 in Bulacan, Pampanga and Pangasinan where more than P1 billion worth of illegally produced cigarettes and counterfeits were discovered. In Pangasinan alone, an illegal factory was raided, which led to the discovery of fake stamps and cigarette making/packing machines that can produce up to 3.6B cigarettes a year.

So claims by the government and advocates of RA 10351 that “8 million Filipinos have stopped smoking since the passage of the law” or “at least 70,000 smoking-related deaths have been averted since 2013” and similar pronouncements may not be true after all? Or are these numbers exaggerated?

The numbers in the table and the huge number of discovered smuggled cigarettes by government raids mean one thing — demand and consumption for tobacco products remained high despite the tax hike. Consumers simply shifted from higher-price to lower-price products, and from legal to illegal or informal sources of tobacco and alcohol products. Like lambanog and tuba.

I made an informal, verbal survey of some small sari-sari stores in a rice farming village in Bugallon, Pangasinan when I went there last month, accompanied by a local. I asked the store owners, “Has smoking and drinking incidence by the people declined, stayed about the same, or increased?”

They replied that they do not have the numbers but they observe that smoking and drinking incidence did not drop or decline. Poor people simply shifted to cheaper brands as new brands with cheap products like Mighty sprouted. The well-off continued patronizing the established higher-price brands despite the rise in prices, they simply reduced their smoking by several sticks a day.

For alcohol products, San Miguel beer is literally wiped out in poorer villages because of its higher price but the consumption of Ginebra, Emperador, Red Horse, and other products has remained the same if not increased. Drinkers usually start with the high alcohol drinks and before going home or elsewhere, they wind down to Red Horse.

Sen. Manny Pacquiao introduced Senate Bill 1599 that aims to increase the unitary excise tax on tobacco products from P30 to P60 per pack, and the annual increase be raised from 4% to 9%. His goal is to parrot the goals of the Sin tax law of 2012 — more money for government, less smoking incidence by the people.

Given the above numbers and facts on the ground, what the boxer-Senator would achieve if his bill becomes a law would be more illicit trade and more corruption in government while gaining more political pogi points for his political plans in 2022.

Instead of introducing another round of higher sin tax, legislators and executive agencies should focus on strictly implementing the existing law and plug loopholes. The proliferation of counterfeit products and stamps mean there is proliferation of corruption in government that allowed such things to happen for several years.

There is a limit to state nannyism and government intervention on how people should run their own lives. Government should limit its unlimited itch to tax-tax-tax, regulate-regulate-regulate, spend-spend-spend.

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See also:
BWorld 158, Why a carbon tax is wrong, October 16, 2017 

BWorld 159, Electoral reforms and the President, October 19, 2017 

BWorld 160, A high carbon tax is irrational, October 25, 2017

Tobacco Tax 10: More Questions on Sin Tax Money

 A physician friend,  Dr. Tony Leachon, posted this PhilStar report  last year.

And peopled asked again, "where is the money?" or "how was it spent?" 

From the law, Sin Tax Reform Act of 2012 (RA 10351), 85 percent should go to fund universal health care (UHC) via PhilHealth and DOH hospital facilities, and 15 percent to fund alternative livelihood to tobacco farmers.

So even non-contributing people, so long as they declare themselves as poor, automatically become PhilHealth members and get free or subsidized hospitalization. Also, all senior citizens, poor or non-poor, get PhilHealth membership card.

The big question is if PhilHealth can absorb all that money. Being a PhilHealth member does not automatically mean there is PhilHealth spending on the person. In my case, I have been a Medicare, then PhilHealth member for 3 decades now, I have never been hospitalized all this time, so PhilHealth has never spent anything on  me yet. Well, my daughter got food poisoning while we were on vacation in Iloilo about two years ago, she was hospitalized, I got some PhilHealth subsidy for the hospital bill.

One ugly feature of this law is the earmarking of revenues for UHC. The DOH, PhilHealth, health NGOs, and consultants, etc. -- are jumping with joy that there are more money from sin tax. Since this money comes from more smokers and drinkers in the country, or the number of consumers of these "sin" products remain the same, indirectly there is a problem here, a moral hazards problem.

With huge money coming in on top of regular appropriation to the DOH that is also rising, what PHealth is doing now is force absorption of the money. Thus, even non-poor senior citizens become automatic members and hence, are covered.

A better option should have been for PHealth to reduce the monthly and annual contribution of paying members, so that the payment gap between them and those who contribute zero and yet are also members, declines.

I have argued before that earmarking is wrong. In this case, many people in the health sector are jumping with joy that there are more tax money from the pockets of more smokers and more alcohol drinkers in the country. If people are concerned with better health, they should be happy if the number of smokers and alcohol drinkers have declined, one indicator of which is that sin tax revenues are declining.

Without earmarking, the bulk of the extra sin tax revenues should have been used to retire some public debt. After all, we will be paying P399 B (yes, almost P400 B) for interest payment alone, and this year 2015 alone. That's how big the public debt is. Lower debt means savings in interest payment, and such savings can be used for the health sector, but at a lesser amount than P43 B in 2014.

This way, there is reason for the health sector to be happy -- smaller public debt, lower interest payment, more savings for the government for all sectors, and more money for the health sector in particular. It is an indirect way to get additional funding without being parochial and being happy that there are more money from the pockets of more smokers and drinkers in the country.

I supported the hike in sin tax. I support a hike in various consumption taxes including VAT, excise tax, property tax, in exchange for drastic reduction in income tax, personal and corporate. Towards the eventual abolition of income tax.

What I did not support was earmarking for healthcare. It creates sectoral parochialism in government. For instance, if PAGCOR will be privatized (about P200 B or higher) expect that only the education sector aside from huge separation pay of employees, will benefit, nothing on health or housing, agriculture, or reducing the public debt. If NPC hydro and geothermal plants will be privatized soon, expect the energy sector and LGUs to benefit, nothing will go to health, agri, infra, etc.

That people are asking until now, "where is the money?" or "how was it spent?" is one proof that earmarking for healthcare creates more questions, more suspicions, and disappointment.

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See also:
Tobacco Tax 6: On Cigarette Smuggling, February 27, 2012. 
Tobacco Tax 7: DOH on NCDs and Tax Hike, March 04, 2012 
Tobacco Tax 8: Ban Smoking, or Raise its Tax?, March 12, 2012 
Fat-Free Econ 27: Sin Tax and Nannyism, October 22, 2012 
Tobacco Tax 9: Why Earmarking Legislation is Wrong, January 14, 2014

Tobacco Tax 9: Why Earmarking Legislation is Wrong

The Sin Tax Reform Act of 2012 (RA 10351) is one year old (enacted December 20, 2012) and after its first year implementation, it seems to have exceeded its revenue target. BIR said sin tax collection in 2012 full year was P50.4 billion, and January-November 2013 collection was P91.6 billion, higher than full year 2013 target of P85.8 billion.

Now some legislators and the advocates of the law are asking, where is that money?
See various reports yesterday,

Phil. Star, Cayetano asks where sin tax money goes
Rappler, Senators: Where is sin tax money going? 
Tribune, After 1 year of rich windfall, gov’t still has no sin tax IRR IRR

This is one reason why earmarking legislation, setting aside the projected revenues to particular sectors and government agencies, is wrong. I don't support earmarking of any revenue measures from new tax or tax hikes, or privatization proceeds. The supposed beneficiaries of earmarking are setting themselves for great disappointment. This happened after Fort Bonifacio privatization, others. Will happen in the future.

Soon, PAGCOR will be privatized, there is no way out with huge public debt of the government, rising by P400-P450 billion a year (!!!) but to privatize it and a few other govt corporations. Other agencies like DepEd, SUCs, LGUs, etc. will lobby for earmarking too for themselves, to the exclusion of other sectors or departments. Wrong. New revenues from whatever sources should be used mainly to reduce the public debt. Savings from interest payment alone, P330-350 billion a year, can be used for priority sectors and departments.

Those who campaigned hard for the passage of this law need not throw the towel. For now, it should be a lesson for them that earmarking legislation is wrong. They are setting themselves for huge disappointment. 

They should also watch PAGCOR privatization, at least P200 B or more, of additional revenues, but other Departments will lobby for earmarking, and exclude public health, agri, etc. Winner take all for the strongest lobbyists among different agencies.

DOH UnderSec Ted Herbosa said that the DOF releases tax collections only after the collection year is completed. Sin tax collections from Jan. 1-Dec 31, 2013 is now in the 2014 budget. P33 B to fund the health premiums for NHIP of the poorest 14.7 million families or estimated over 40 million Filipinos.  Hospitals may get their increased income by providing health services to these Filipinos who were previously uninsured.

I thanked him for his good clarification, but while additional tax revenues were realized, the PH public debt keeps rising. From P5.21 trillion in Sept. 2012 to P5.61 trillion in Sept. 2013, or P400 trillion rise in one year. A P6 trillion total public debt by middle of this year seems no sweat. And that exposes one problem of budgetary earmarking -- luck to one or two department/s, woe unto others. When PAGCOR, other parts of Fort Bonifacio, other military camps, etc. will be privatized, woe unto other departments too as they will be excluded from additional revenues. Meanwhile, the public debt, and annual interest payment, will keep rising, and keep depriving everyone else of more money, they will go to the pockets of lenders. About P352 B this year on interest payment alone. http://www.treasury.gov.ph/.../NGDebtSept2013...

Meanwhile, see this new development. DOH is not so much a fan of the UP PGH, it thinks that the Department has been giving away research money somewhere else. From interaksyon, 

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See also:
Tobacco Tax 6: On Cigarette Smuggling, February 27, 2012. 
Tobacco Tax 7: DOH on NCDs and Tax Hike, March 04, 2012 
Tobacco Tax 8: Ban Smoking, or Raise its Tax?, March 12, 2012

Privatization 4: Utilizing Proceeds and Revenues, August 06, 2010
Privatization 8: Government Debts: Military Camps and Spratly Issue, June 20, 2011 
Privatization 9: PAGCOR and Casino Operations, May 16, 2012 
Fat-Free Econ 12: Privatizing PAGCOR, June 08, 2012 
Privatization 10: More on Selling PAGCOR, June 12, 2012

Election Watch 5: Sin Tax Law, Hospital Over-regulation and Senatoriables

The Senatorial and local elections are just six days away. Yesterday and today, two groups in the health sector released their own separate statements endorsing certain Senatorial candidates with their respective reasons.

I got this today from the President of the Private Hospitals Association of the Philippines, Inc. (PHAPI) and a friend, Dr. Rustico "Rusty"Jimenez. This is a joint statement of PHAPI and the mostly government hospitals association, the PHA.

They also endorsed four party list (PL) groups, but am skipping those. Am not interested in any of those groups, I am boycotting the PL system. Here now are the reasons why the two hospital associations have endorsed the nine Senatorial candidates above. Note the last item -- overregulation of private hospitals by various government bureaucracies, local and national.

The ugly habit and corrupt nature of many government bureaucrats would show up just anywhere.

Meanwhile, here's another statement from another group of health groups. The main coordinator, Dr. Tony Leachon, is another friend of mine. They endorsed only four candidates, but mentioned eight candidates that voters should never support, based on the criteria they laid out.

Only Koko Pimentel and Sonny Trillanes are the common candidates of the two groups.
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Doctors Prescribe: Go Out and Vote for Health

Manila, Philippines (6 May 2013).  Trust your doctor. Doctors and health advocates called on their patients and colleagues to go out and vote for health on May 13. “Exercising your right to vote is good for your health,” said Dr. Tony Leachon, Secretary of Philippine College of Physicians, “This is a powerful opportunity for us to flex our muscles to put true health champions in Senate, who will fight for health.”

“Six out of 10 Filipinos die without ever seeing a doctor,” added Dr. Tony Dans, President of Philippine Society of General Internal Medicine (PSGIM), “The high cost of health care in the country prevents people from accessing life-saving services, and drowns families further into poverty.”

In 2010, Filipino families spent more than half of the country’s annual health expenditure according to the National Statistical Coordination Board. “Mahal magkasakit. Mabuti kung may bulsa na puwede paghugutan, kung wala mamatay ka na lang?” added May-i Fabros from WomanHealth Philippines, “Enshrined in our Constitution is our right to health, which is why we need to ensure that those who we elect into power will push for health reform policies that will make access to health services equitable for all, regardless if you have money or not.”

Sin Tax Law as Criteria in Voting for Health

“Although health is just one of the considerations when choosing candidates, its impact in our lives resonate, we need a health criteria to help us vote for true champions for health,” said Jo-Ann Latuja, Senior Economist of policy think tank, Action for Economic Reforms. “We can use their position on the Sin Tax Law as a proxy measure for health and societal reform since it addresses the issues on health financing, universal health care, governance, corruption, economic reform, and vested interests, among others.”

The Sin Tax Law or Republic Act 10351 was one of the critical and highly controversial health reform measures that passed into law before the end of 2012, amidst the strong tobacco industry lobby. "Words are cheap, what we need are true champions for health who will battle it out with vested interests in the halls of congress," said Dr. Maricar Limpin, Executive Director of Framework Convention on Tobacco Control Alliance Philippines (FCAP), one of the first tobacco control groups who fought against the anti-health Sin Tax Law of 2004, or Republic Act 9334, which maintained the status quo and kept tax rates pegged at 1996 prices. "We will vote for legislators who will fight for health, and reject those who will most likely fight against health."

"What we are presenting are Pro-Health and Anti-Health candidates based on our critical appraisal of their health position particularly on Sin Tax," continued Latuja, "With health as our criterion, we encourage the public to assess the track record of the candidates for local and national positions, particularly those who have the obligation to pass national policies that will health our health system.

The doctors, economists and health advocates presented their review process of the 33 senatorial candidates. First, they identified the incumbent candidates who had the chance to vote for what they referred to as the effective and pro-health Sin Tax Law of 2012 or the defective and anti-health Sin Tax Law of 2004. After which they assessed the most recent statements on RA 10351 of the candidates, whether they are for or against it. 

Combining these two they identified only four (4) Pro-Health candidates - Risa Hontiveros, Jamby Madrigal, Koko Pimentel, and Sonny Trillanes, but were able to identify eight (8) Anti-Health candidates - Gringo Honasan, Chiz Escudero, Jack Enrile, Migz Zubiri, Ernie Maceda, Mitos Magsaysay, Teddy Casiño, and Christian Señeres. 

The group led by the Philippine College of Physicians, Philippine Society for General Internal Medicine, Philippine College of Chest Physicians, and civil society sin tax advocates, Action for Economic Reforms, WomanHealth Philippines, and FCAP held the press conference during the 60th Anniversary of PCP and its 43rd Annual Convention to inform the public of the pro-health and anti-health stance of the 33 Senatorial Candidates.

Tony Leachon,MD

Consultant of the Department of Health on Noncommunicable Diseases

Director,University of the Philippines Manila,Information,Publications & Public Affairs

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See also:
Election Watch 1: Anti Epal Photos, June 29, 2012
Election Watch 2: On Celebrities as Politicians, August 19, 2012
Election Watch 3: Defining Celebrities, Politicians and the State, August 30, 2012 
Election Watch 4: Senatoriables on Healthcare, March 08, 2013

Fat-Free Econ 27: Sin Tax and Nannyism

* My article yesterday in TV5's news portal,
http://www.interaksyon.com/business/46120/fat-free-economics-sin-tax-and-nannyism
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The bill raising the excise tax for tobacco and alcohol products – a.k.a. “sin tax” bill - is a tax bill mainly, and a health bill only second. It is a tax bill because its main goal is to raise revenue for the government, from a minimum target of P20 billion on year one alone, to a maximum target of P60 billion.


It is also a health bill because its second purpose is to discourage more people from smoking and drinking more by raising the price of cigarettes and alcoholic products. Various studies cited by physicians and health groups who supported the tax hike bill show that many debilitating diseases that affect millions of Filipinos each year are directly or indirectly related to smoking. Hence, less smoking, less diseases. And that makes the bill plausible and worthy of public support. This writer is among the many supporters of the tax hike for these products.

Certain sectors though go far beyond and suggest that the tax hike should be as high as possible while some suggest that cigarettes should simply be banned and prohibited, and government should not expect revenues from this “sin” and unhealthy product.

And that is how governments become more interventionist because many people themselves are interventionists. They have a particular worldview or opinion on how the rest of humanity should behave and run their own lives, so they concoct or devise various forms of regulations, restrictions and prohibitions. There is intolerance, explicit or implicit, in the diversity and spontaneity of the lifestyle of other people, so the “solution” is to invite and impose new regulations and restrictions by government so that the specific worldview as advanced will hopefully be realized.

And so while this writer is in favor of raising the excise tax on tobacco and alcohol products, preferably with just one rate and not two or three, the public should also recognize that people own their bodies, not the government or physicians or media or anybody else. Thus, even if government will raise the price of cigarettes to P500 per pack, people who want to smoke will always find a way to smoke, like usingnga-nga, buy smuggled cigarettes, make their own cigarettes or sell low-keykarinderia type, and so on.

And this brings us to three issues.

First, banning and prohibiting the consumption of cigarettes is wrong and unenforceable. There are many services that are currently banned by the government now, like prostitution, dangerous drugs, jueteng and other forms of gambling. And the result is more corruption in government as all these services and goods are available in many places in the country. Government officials simply allowed these in exchange for huge bribe money.

Second, using taxpayers’ money to subsidize the healthcare of people who deliberately abuse their body is wrong and economically distortionary.  If many people will over-smoke, -drink, -eat, or -sit,  and they become sickly later on, the rest of society should not be penalized by taxing them more, or denying the tax cut proposal. If those guys can buy lots of cigarettes and/or beer/alcoholic products, fatty food and drinks, and can afford to be couch potatoes, then it is assumed that they also have some resources to buy private health insurance to augment their Philhealth membership benefits.

Third, potential revenues from the excise tax hike should be delinked from funding universal health care. The new tax revenues should instead be used to reduce the public debt, or reduce the programmed annual borrowings. Any savings in interest payment can be used to expand the funding for UHC. For 2013, for instance, interest payment is projected at P334 billion, up from P317 billion this year. If such spending can be reduced to, say P300 billion, the P34 billion savings in one year can be used for UHC and other social programs. 

Reducing the public debt and the high interest payment is possibly the single biggest anti-poverty program that the government can do. To achieve this, raising the sin tax is one measure, privatizing some government corporations like Pagcor is another, and cutting the budget of certain agencies is another measure.

Of the three issues mentioned above, only the last two are problematic due to the nanny-state thinking in many sectors in the country. The first issue is not getting wide public support and this is a piece of good news.
The second issue in particular is tricky. A friend asked (a) if sin taxes are issue of civil liberties, (b) if every adult citizen should have an unabridged right to smoke cigarettes and drink alcoholic products, and (c) whether we should valorize individual freedom above all other values.

For this writer, the quick answer to the three questions is, yes. If people will say no - that government has the right to curtail an individual’s itch to smoke and drink as much as he wants, say inside his own house and not disturbing the neighbors - then they are implying that the state has jurisdiction and even ownership of a person’s body.

If that is true, then the government will have the “right” to prevent or restrict other people from eating fatty and oily food, carcinogenic food, as their healthcare later on will be assumed by the government. Or the government can also restrict or prohibit people from climbing steep mountains, trees and rooftops because if they fall, their treatment will fall again under public healthcare spending.

People should recognize that they do not own other people’s bodies. Let other people do what they want with their body. Since there are potentially adverse health outcomes, then let the people get private health insurance from various service providers -- NGOs, corporations, local governments, others. This is on top of the state-run Philhealth system.

This way, the “negative externality” of people’s unhealthy or risky lifestyle will be internalized solely by them, and the rest of us will be spared more taxes and fees to finance more public healthcare spending.

There is a limit to nannyism. As the world modernizes further, people’s lifestyles will continue to evolve. People should learn to be more tolerant of other people’s lifestyle evolution and modernization. And they should learn to protect their turf by opposing government moves to further socialize and collectivize their incomes and savings, purportedly to expand healthcare for others, including those who deliberately abuse their own body.


See also:
Fat-Free Econ 23: Penang Workshop on Markets in Healthcare, September 10, 2012
Fat-Free Econ 24: Government Fat and Public Expectations, September 21, 2012
Fat Free Econ 25: Property Rights and the Cybercrime Prevention Law, October 01, 2012
Fat-Free Econ 26: US Public Debt and the November Elections, October 10, 2012

Tobacco Tax 3: When Supply is Killed But Demand Persists, November 15, 2010
Tobacco Tax 4: Finding the Optimum, Not Maximum Cigarette Tax, May 26, 2011
Tobacco Tax 5: Consumer Demand After Tax Hike and Smuggling, February 23, 2012
Tobacco Tax 6: On Cigarette Smuggling, February 27, 2012.
Tobacco Tax 7: DOH on NCDs and Tax Hike, March 04, 2012
Tobacco Tax 8: Ban Smoking, or Raise its Tax? March 15, 2012