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 169, On tobacco tax and plain packaging

* This is my column in BusinessWorld last November 30, 2017.

Protection of private property rights — including physical and intellectual — is an important cornerstone of a free society. People can exclusively use, keep, sell, donate or give away their property if they want to.

There is a measurement of property rights protection worldwide being done annually by the Property Rights Alliance (PRA), a Washington DC-based think tank. It produces the annual International Property Rights Index report and partners with independent, nongovernment, and market-oriented think tanks and institutes from many countries. IPRI covers three major areas: (1) Legal and Political Environment, (2) Physical Property Rights (PPR), and (3) Intellectual Property Rights (IPR) that include protection of patents, trademarks and brands, copyrights and trade secrets.

In the IPR of several ASEAN countries, the gap is not very wide between say, Singapore and the Philippines or Indonesia (see table).

Currently, there are IPR issues that are intertwined with taxation issues of some “sin products” like tobacco and alcohol.

In the Philippines, the sin tax law of 2012 or RA 10351 is turning five years old next month. The law has dual purposes of (a) reducing smoking and drinking incidence in the country by raising tobacco and alcohol taxes, and (b) raising more government revenues.

So far, both have been achieved but there are moves and legislative bills to further raise tobacco tax to twice or thrice their current rates.

In December 2012, Australia introduced a variant of this law aimed to further discourage smoking. Its plain packaging law required tobacco companies to remove the brand, trademark, and logos of its tobacco products and replace them with plain packs with graphic warnings.

Since some smokers may be unable to distinguish good brands from new and/or inferior brands, they are supposedly discouraged from stop smoking.

While the goal is good — to protect public health — the means and the policy leaves much to be desired.

Since it is assumed that consumers can no longer distinguish good brands from inferior ones, brand competition is precluded.

As a result, companies will now be forced to compete on the basis of prices alone, allowing players with poor but cheap products to gain advantage and attract more customers.

Which may then defeat the purpose of anti-tobacco initiatives because this may yet increase the incident of smoking.

Five years after introducing its plain packaging scheme, has Australia been able to meet its goal?

The Australian government collects data on national smoking incidence every three years as part of its National Drug Strategy Household Survey (NDSHS).

Based on 2016 data — its most recent — there has been no statistically significant decline in the overall daily smoking rate between 2013 (12.8%) and 2016 (12.2%).

So the plain packaging scheme is a failure in Australia.

Moreover, the plain packaging law has unwittingly succeeded in raising the consumption of illegal tobacco, estimated at 13.9% of total consumption in 2016. This results in an estimated excise tax loss of A$1.6 billion for the government last year.

Furthermore, Australia is also facing a dispute resolution panel at the WTO for implementing the law that disrespects IPR laws on trademark and branding.

France and the UK have also introduced the plain packaging scheme in recent years. One unintended result in France is the rise in illicit tobacco coming from some terrorist groups and criminal syndicates while the French government suffered an excise tax loss of approximately €2 billion in 2016. This illicit trade was linked to jihadists traveling to Syria and Iraq and terrorist attacks in France. Counterfeit cigarettes are also among the most investigated IP-crime in the UK and are linked directly to criminal organizations.

In Asia, there are plans to introduce plain packaging legislation in Singapore, Malaysia, Taiwan, Sri Lanka, and Nepal.

This may a dangerous precedent.

Soon, other “sin products” will be targeted — alcohol, sugary drinks and beverages, fatty foods, even toys.

I am a non-smoker and have never been a fan of smoking. I am just a fan of individual liberty and people having the freedom what to do with their own body and life, also a fan of the rule of law and people’s right to private property.

The plain packaging scheme is dangerous because (a) it disrespects private property rights and IPR laws, (b) encourages the production of illicit items from illicit and possibly criminal players who can easily play with price competition, (c) it encourages more consumption because very cheap products with no brands are more easily available, and (d) it reduces government potential excise tax revenues, which might result in creating new taxes elsewhere.

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See also: 
BWorld 153, Property rights, trademarks and consumer protection, September 30, 2017

BWorld 166, US energy trading and implications for Asia and Philippines, November 26, 2017 

BWorld 167, Multilateral, bilateral, or unilateral liberalization, November 27, 2017
BWorld 168, Uncertainty in mining policy and the Manicani debate, December 12, 2017

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

IPR and Innovation 31, Plain packaging and trademark-busting

Trademarks and brand logo are important to distinguish companies and producers from each other. A customer can say, "I don't want to ride airline X because they are frequently late/delayed, nor airline Y too because they are expensive, I prefer airline Z because their fares are cheap they mostly fly on time." That is branding from the perspective of customers.

When government or many groups dislike or hate something, this is how regulations and later prohibitions look like:

1. Raise the tax, make it more expensive.

2. Restrict or prohibit advertising to certain events.

3. Mandate graphic warnings, like "Smoking kills" and show ugly pictures of dilapited lungs and mouth.

4. Actual product restrictions to certain consumers, like "for people above 21 years old" and so on.

5. Ultimately, plain packaging. Like all tobacco products, all beer and wine products, all  chocolate bars, etc. to be labelled as plain "cigarettes" or "beer" or "red wine" or "chocolate". 

Boring and lousy, right?

Of course smoking -- and drinking lots of alcohol, and taking lots of soda, ice cream, eating lots of fatty, salty, preserved food, sedentary lifestyle, etc. etc -- is bad for people's health. 

But people -- not the state or media or the health NGOs, etc. -- own their body. People recognize the risks of smoking, drinking, drugs, etc. and they compare such health risks with the pleasure of smoking and drinking. Then they decide whether to continue doing it or stop; if they continue, whether to smoke 1 or 20 sticks a day, drink 1 or 6 bottles of beer a day, etc.

Too much nannyism by the state purportedly to "protect public health" is wrong, and is a clear smoke screen and excuse for more taxation, more regulations, prohibitions, more government.

Plain packaging of tobacco, beer, whiskey, chocolates, etc. in the Philippines, I do not think this kind of legislation will prosper here. Mainly because legislators themselves are among the big fans of branded tobacco, beer, wine, etc. But it is an opportunity for big time extortion by health regulators and/or legislators.

Meanwhile, the graphic photos law against tobacco consumption, the implementing rules and regulations (IRR) to be signed soon, http://www.interaksyon.com/article/123786/doh-implementing-rules-for-cigarette-graphic-health-warnings-out-before-march

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See also:

IPR and Innovation 27, India strengthening its IP protection, September 30, 2015 

IPR and Innovation 28, Recent IP development in Singapore, October 10, 2015 

IPR and Innovation 29, Civil society enforcement of patents, copyrights, January 18, 2016 

IPR and Innovation 30, Patents and pharma issues in Asia in 2007, February 07, 2016

Tobacco Tax 9: Why Earmarking Legislation is Wrong, January 14, 2014 

Tobacco Tax 10: More Questions on Sin Tax Money, March 03, 2015

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

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

Tobacco Tax 8: Ban Smoking, or Raise its Tax?

A fellow UPSE alumni and a friend in one of my discussion yahoogroups, Gary Makasiar, made a good argument that instead of debating by how much tax hike to slap on tobacco products, ban smoking outright. Posting this with his permission. The photos are not part of his original posting, I just added them here.  Our exchange has extended, I am putting the dates when the exchanges have taken place. Almost 10 pages long.
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10 March 2012

If we really believe smoking tobacco kills, why is the debate still circling around a/the sin tax? If we are honest with our premises, we should just outright ban domestic smoking of tobacco. The sin tax does not have to even figure in. This tax debate is appearing to be just like some tongue-in-cheek pontification. Proponents pretend to tax in the name of public health but secretly pray for smokers to continue their destructive vices to generate revenue. Much of the tax-happy pressure is coming from financial institutions, not health institutions If we want to realize zero local smoking at the soonest time, the most honest and dramatic way is to make smoking illegal overnight. That automatically does away with the tax debate, altho admittedly, it may not necessarily eradicate local smoking unless enforcement is strict and impeccable.

We should not even be hoping to realize taxes from local smoking if we are sincere about its evil effects. So why does a raging tax debate continue to be entangled with a public health no-brainer? Because any tax deliberation (including the sin tax) could only have arisen from fiscal and financial sources, considerations, motives and objectives. The social harm caused by smoking seems to have been used only as a convenient excuse (escucha) to justify a new tax initiative. Sadly, everyone around the table speaks with forked tongue and bad nicotine breath.


If smoking is truly a health hazard in whatever form, then the logical solution is to ban it. Smoking is anyway easy to monitor and enforce. Th light is visible and the smoke is easily detectible. The telltale signs are difficult to hide indefinitely. Huge rewards for whistleblowers should go a long way to help enforcement. The livelihood of the tobacco farmers can (and indeed, will have to) be addressed as a separate issue. Their efforts can be redirected entirely or partly to tobacco exports instead of being focused on the local market; and for those in farms that no longer have comparative advantage in growing tobacco, the skills of farmers there can be diverted to other crops that enjoy sustained regional demand (congress can allot budgets for retraining purposes, if they feel this to be a national imperative...but it does not have to come from a sin tax at all. Most probably it wont even be necessary as farmers and local enterpreneurs naturally migrate away from the unprfitable tobacco crop), or else to smuggling out local tobacco manufactures towards countries that impose atrociously high sin taxes on tobacco consumption.

Of course, it has to be realized tho that banning could very well just replay the prohibition years of the 20s in the US. Which gave rise to organizations and deviant celebrities like Al Capone. Contraband money was so good that these bosses were rumored to have corrupted city officials so thoroughly everywhere they operated. They became known as untouchables. The stakes were so high, that bootleg rival gangs thought little of wasting each other away. Of course, the alternate version is that local politicians were actually the ones in control and just let Capone and the others do their dirty work, including offing each other.. It is said that local officialdom was so corrupted and local govt protection so complete that the Fed government could only take Capone out on tax evasion charges. No smuggling charge could be made to legally stick. Finally, the US government (possibly envious of city officials) had to back track and lift the policy of prohibition altogether.The problem is that tobacco smoking is a nastier health hazard than alcohol, because of second and third hand smoke. Alcohol is not yet known to possess a similar externality. although drunken driving has had its fair share of the annual death toll.


Not too far back in our history (late 50s, early 60s), blue-seal cigarette smuggling also became rampant when imported brands were subjected to high import duties. Most industry players had to play ball with the politicians who controlled the coastlines nearest to the local markets for protection and safe harbor, and later on also with those who controlled the tobacco-growing regions to benefit from the "protection" offered by the high 'tariff walls'. This period in our history is well known and well-documented. This is prolly what the opponents of the high sin tax are warning against. But if everyone is seriously debating public health, taxes do not even have to figure. If they comtinue to do so, it must be because there is another root agenda even more important to some people than just public health. Possibly, the public kitty.


Here kitty kitty kitty. There kitty kitty kitty. everywhere kitty kitty kitty.

-- Gary

I thanked Gary for his well-argued position. On outrightly banning tobacco products for public health reason, here are some scenes that I see.

1. The corrupt government (national and local) officials and employees who will implement this will be very happy. It will be like the current policy of banning prostitution, banning shabu and other dangerous drugs and substances, banning jueteng and other gambling. All these things banned, sure, but they are all existing, alive and kicking, just around us. Banning them is abetting and encouraging more corruption in government, not controlling or reducing bot the use and practice of those services, as well as government corruption.

2. The public finance officials like those at the DOF, DBM, NEDA, and also those in Congress, will be unhappy because as Gary pointed out, revenues from tobacco products are about kitty-kitty-kitty. They want money from anywhere and from anybody. Pick any reason or alibi, so long as they can get more money from the public with the least resistance, they will do it. If raising the income tax (personal and corporate) to 50 percent or higher will meet minimal resistance, they will do it

3. The health officials like those from the DOH, PhilHealth and PopCom will be unhappy too, contrary to what Gary and other people believe. The health officials have already factored in xx billion pesos per year that will go to their agencies to finance universal healthcare, to finance the fight against lifestyle-related non-communicable diseases (NCDs), and to finance the purchase of various population control paraphernalia via the forthcoming Reproductive Health (RH) law.

4. The poverty fighters at the UN,WB, ADB and other multilaterals will also be unhappy as all their grand designs and plans to "fight/eliminate poverty" are premised on the government having as much tax money as possible. Even if the government will collect just one-half or one-fourth of the projected P60 B per year in additional revenues from the tax hike, hey, that's still money that can help finance the MDGs and other central planning measures to "fight poverty."

5. Hard core smokers will be unhappy too because the government, again, intervenes in what they think and feel gives them personal utility and satisfaction. Majority of smokers, including PhD guys, alive or already dead, are aware of the risks of smoking but they still want to smoke, why prohibit them from doing so? It's their own lives, their own body and lungs, that will suffer, not somebody else.

People can argue that second-hand smoke is more dangerous than that puffed by the smoker. I disagree. A smoker inhales both first hand and second hand smoke.

So with the above considerations, it seems that allowing smoking but taxing it high enough -- not outrightly banning smoking -- will make the majority of stakeholders happy. Both the tax-hungry and health officials and bureaucracies, the legislative bureaucracies, will be happy, along with the smokers, hard-core or soft-porn smokers.

Tobacco Tax 7: DOH on NCDs and Tax Hike

The Department of Health, along with WHO, officially recognizes the increasing risks of non-communicable diseases (NCDs) and since many of these are directly or indirectly caused by smoking, it is naturally expected to support proposed legislations raising the taxes on tobacco. I also think that very few people in this country ever oppose such move. I support it myself 100 percent. I think the debate is limited only on the level and rate of increase that should be taken.

DOH Sec. Enrique Ona made a presentation at the House of Representatives' Committee on Ways and Means last February 21, 2012, about the proposed hike in tobacco taxes. Below are his slides.

Upper right: as societies develop, death from infectious diseases decline while death from lifestyle-related and NCDs increase. There is clear recognition that people's unhealthy lifestyle increases the risk factors for NCDs. I have no question with these data and observations.

Below, incidence of death due to NCDs is the same in South East Asia including the Philippines, as that of the global average -- around 60 percent of total deaths. I have no question with these data except this observation: "tobacco use, unhealthy diet and physical inactivity... Disadvantaged sector is most affected."

The poorer and disadvantaged sector is now smoking more, eating more healthy food, and becoming more physically inactive. Which may imply that (a) they are earning more but spending more money on smoking, (b) they are earning more and eating more, but the unhealthy food, and (c) earning more and can afford to be more physically inactive. There are contradictions here. But we proceed.

Below: diseases of the young Meaning more young people are fat if not obese, more young people are smokers. Poorer countries are more susceptible to NCDs. This implies that people in the developing world are more sedentary, more addicted to fatty food, more smokers, more drunkards, and so on.

Now look at bottom right slide: "Lifestyle related disease is not a disease of affluence... One reason for greater death rates in the poor is that the poor smoke much more than the rich." I think there is a contradiction here. The poor are victims of NCDs because they smoke more than the rich, so why are they victims? Did anyone put a gun on the heads of the poor telling them to smoke one or two packs a day or more, otherwise they will suffer physical beating, or their heads will be blown away? I'm sure there is none.

My main critique of such analysis is that it acquits the poor of having more personal responsibility in running their own lives. If they smoke more, if they drink more, if they eat more fatty food than vegetables and fruits, and so on, they are victims of some "external forces" and hence, government must bail them out from such irresponsibility.

If government will say to the people, "Don't worry much being irresponsible to your body, when you get sick, I will take care of you", then we will have more smokers, more gamblers, more fat people.

Below, the poor have little or no access to prevention due to their low education. Is this an acceptable reason or alibi to acquit people of being irresponsible about their body? Maybe, but maybe not.

Now look at bottom right slide: DOH budget is P40 billion, but smoking related expenditures is 10x that at P400 billion. If the problem is this big, then perhaps raising the tax on cigarettes is not the answer, but outright banning of cigarettes, to close down all tobacco manufacturing plants, to disallow the planting of tobacco, etc.

The DOH is aware that outright banning of smoking is impossible to implement. If the demand is there regardless of the prohibitions by the government, then supply will find its way towards the consumers. Thus, certain leeway must be allowed for people to smoke. It's their own lives. Like people who do risky sports (rock climbing, cliff jumping, race car/motorcycle drivers, etc.)

Below, a study done in 1999 estimating that tobacco-related expenses and loss of productivity from 4 out of 40 smoking-related diseases, was P46.4 billion a year. That was a big amount then.

A study on tobacco control program in Thailand.

Table below shows that Philippine cigarette taxes are not exactly low or "among the lowest in the region. Of the 9 S.E. Asian economies, Philippine taxes are 4th highest.

Again, I reiterate my support to a hike in tobacco taxes in the country. If a 1,000 to 10,000 percent increase can be fully implemented and cigarette smuggling can be fully stopped and controlled, I will support that move then. Being a non-smoker ever since, I have no love affair with cigarette or cigar. But I think the probability that the government can fully control cigarette smuggling is as high as the probability of an average Grade schooler passing an exam on partial and differential calculus.  Thus, higher tax rates can only mean higher incidence of smuggling.

Many smokers will not be comparing Philippine tobacco prices vs. Singapore or Malaysia prices. Rather, they willl be comparing cigarette prices before and after the tax hike.

I wish the DOH and other groups and individuals pushing for tobacco tax hike, to be successful in this campaign. I also support a unitary or single tax rate to apply to all cigarette products. But more than government intervention via higher taxation to reduce smoking incidence, it is more important to remind people over and over again, that healthcare is first and foremost their own personal responsibility, not government's, especially for lifestyle-related diseases. Thus, the need for the government to step back in subsidizing personal irresponsibility via higher budget for NCDs. Infectious diseases and pediatric diseases remain dangerous that claim many young lives until now. That's where the bulk of our tax money for health should go.

If people have the money to buy a pack or two of cigarettes a day, then they should have the money to buy private health insurance on top of their PhilHealth membership which will soon become more expanded. Or at least save money for their future costly healthcare.
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See also:
Tobacco Tax 1: Telecom and Medicine Taxes Too, September 15, 2009 
Tobacco Tax 2: Higher Tax + Corruption = Lower Revenue, June 06, 2010
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 6: On Cigarette Smuggling, February 27, 2012.

Tobacco Tax 6: On Cigarette Smuggling

I posted my paper last February 23,  Tobacco Tax 5: Consumer Demand After Tax Hike and Smuggling, to some of my discussion yahoogroups, it attracted many good comments and counter-comments. I am posting them below. Get your favorite snacks, this is 11 pages long, cheers.
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Noy,

As usual I am amused by the graphical presentations. To begin with, it is quite amazing that anyone has been able to locate the curves at all in the x-y quadrant, when there have been no references made to previous reserach studies, that have computed for the coefficients of the cigarette demand or supply function, say in an urban setting. As you well know, slopes, inflections, and elasticities matter. Without these information, we will not know exactly where final prices and consumption will end up. Even granting the general directional shifts that you posit, without providing the precise location of the starting curves and their elasticities, one could arrive at any set of prices and consumption outcomes, and their ordinal relationships with each other, that would be different from the ones you concluded.

First off, there may be more lines in the graphical presentation than is necessary. If we limit movements to sin taxes alone on local cigarette manufactures and legit imports, there would be no reason for the demand curve to shift. One would think that final equilibrium price (and consumption) will just move along the original curve, not necessarily outside of it. Dont you agree? It will be the supply curve shifts that will determine the movement along the demand curve and the final outcomes wrt price and volume. . If this is true, then straightaways we can do away with or remove two cluttering lines from the chart.

Secondly, I agree that the supply curve will experience a shift, if the level of sin taxes change. As this will affect the marginal cost of making (legit) cigarettes available to the relevant market. But it will affect only those portions of the supply curve that represent the MC of local 'manufactures' and legit imports. I seem to recall from 101 that the supply curve is the MC envelop curve for all stocks made available to the market (i.e., in this case, local manufactures, legal imports, all the way up to contraband and smuggled). The 'stacking' or consumption order is from cheapest to most expensive. New sin taxes will certainly rearrange the original stacking order. But I doubt that the portion of the curve depicting contraband stuff will necessarily change. We are only sure of is that the final transaction or clearing prices in the relevant market will change.

Thirdly and lastly, the critical gap in the graphical presentation is the omission of the externalities ( social or health costs of smoking in a populated setting), which probably would impact the demand curve more since it is actual smoking that 'kills'. Like all pollution issues, this is the toughest nut to crack. But I think that only with these refinements, can discussions on sin taxes become more informative and productive. And that without them, we simply would remain in the dark, if not actually even be misleading.

Pardon this humble intervention but it has been a while since I last engaged. The real reason is I finally got a new internet connection with a cheaper provider. More power to you..

- Gary

Ahhh, the beauty of being criticized by Gary's wisdom. And that's the irony of it -- you won't draw him in unless you post something that is amusing to him, and I'm glad that I made one :-)

My additional points to your comments, Gary.

The graph is hypothetical, no assignment of figures and numbers. So P1 can be P5 per pack, or P22.25 or P49.50 or other random or estimated numbers that one can assign from some empirical studies out there. And yes, there can be as many supply curves and demand curves at different micro levels (demand curves by Mr. Smoker A, by Ms. Smoker B, byTherapist Smoker C, by Magician Smoker D, by Smokers ageing 15-19 yrs old, 20-24 yrs old, etc.). Likewise, Smuggler A will have his own supply curve different from the supply curves of Smuggler B, Smuggler C, and so on. But I limited the S and D curves to only 3 each for simplicity purposes. In fact I wrote that paper mainly for the various health NGOs and health professionals as my target audience, as they are the ones who are relatively active in pushing for really high tax rates for tobacco and alcohol products, mainly for public health reason, not so much for public finance. Thus, the need to simplify the graph.

It is possible that only the different supply curves will be moving and the demand curve will stay as is, and so the new equilibrium price will just lie along the original curve, I agree. But the probability of the demand curve moving rightwards or leftwards is larger than the probability of it staying in the same place. As Alex Magno wrote, if the tax is hiked from P2.70 to P30 and the retail price will go up to P100 per pack, then one option for him and other smokers is to totally quit smoking and so, DOF will collect not P30 but zero from each smoker who quit. And as I discussed in the paper, another option for smokers is to totally abandon the known brands that were hit by the tax hike and shift to lesser known cigarette brands that pay zero tax because they are entirely smuggled. The smuggler definitely paid bribes to certain government officials to make his smuggling easier, but the upward influence of bribes to the retail price is much lower than the upward tick due to the tax hike if the smuggler was a formal supplier.

The proposed larger state intervention via higher tax rate is supposed to address the social externality issue. About 7 of the 10 leading causes of death in this country are smoking related, directly or indirectly. It's good actually that we do not have elaborate and expensive welfare system that gives free hospitalization, free healthcare, etc. to people who abused their body and we ordinary mortals contribute for their healthcare so that they won't meet their creator much earlier than what they really desire.

Meanwhile, I am curious of the various simulations and elasticities. the major assumptions by the DOF in coming up with the magic number, P60 billion per year of additional revenue collections; ie, P60 B on top of existing tax collection from tobacco and alcohol products. Did they assume that tobacco smuggling is totally or partially curtailed?

- Nonoy

Noy,

I dont want to belabor this issue, but the actions of Alex Magno and his tribe (reacting solely to retail price signals) can very well be accomodated by, and along, one and the same demand curve. There is no real need for that curve to shift just because his group is constricting consumption due to market price changes. .Anyway, I get the drift of your argument and would now want to beg off this interesting debate. It may be well to remember that tax people feel it their duty to continually come up with measures that will keep tax revenue levels from falling, since expenditure levels are not within their immediate sphere of control. Thats within Congress's prerogatives. They know how unpopular that task is. So we can appreciate that they start off with really atorocious tax proposals, which they can then whittle down until it finally meets with public acceptance. You are doing a yeoman's job speaking for consumers. .

- Gary

Really? You assume that smuggling will ensue when we raise taxes on cigarettes? Even with the rate of tax hikes which brought Alex Magno to such fits of hilarity, cigarette prices domestically will still be much lower than those sold in other countries. When domestic prices are lower than international prices, what is the incentive to smuggle?

- Ms. H.

Tobacco Tax 5: Consumer Demand After Tax Hike and Smuggling

The debate on raising taxes on tobacco and alcoholic products is heating up again, and this is good because the proposal is targeting two major but separate objectives: improve public finance and public health.

I am in favor of raising such tax, but not at very high rates. The main consideration should be finding the optimum, not maximum, tax rate based on multiple goals advanced by the advocates of such proposal. I developed a graph for this argument below. But before my longer discussion, I am posting two reports here.

In a column in Philippine Star last February 02, 2012, Alex Magno wrote,

The DOF says government will raise an additional P60 billion in revenues by restructuring the existing excise tax system on cigarettes and tobacco. The agency proposes to raise tax rates on these “sin” products by as much as 1,000%.

What this means for ordinary consumers is that, within the next two years, the excise tax collected per pack of cigarettes will rise from the current P2.72 to P30. The price per pack of cigarettes will rise, in two years, from around P40 to somewhere close to P100. What this means for me, in particular, is that I will finally kick the habit. If I do that, government revenue from me in particular will drop from P2.72 to zero — not the P30...