Tuesday 14 June 2011

Inequality and sin taxes

From the Beeb:

Inflation 'is higher for the poor than for the rich'

People on low incomes have suffered higher inflation than those on higher incomes in the past decade, the Institute for Fiscal Studies has said.

The poorest 20% of households faced an average annual inflation rate of 4.3% between 2008 and 2010, while the richest 20% only had a rate of 2.7%.

And why is that?

People on lower incomes spend more of their money on gas, electricity and food, which have risen sharply.

At the same time, people with higher incomes have benefited more from lower mortgage rates.

This is fair enough, as far as it goes. The reason I mention it is that it underlines the conflict between the desire to relieve poverty—or reduce inequality, although the two concepts are very different—and the desire to use the tax system to influence behaviour.

What the IFS doesn't mention is that one of the main reasons gas, electricity and food are so expensive is that the price has been artificially inflated to serve an alleged environmental agenda. Oil and wheat prices exacerbate the problem, but the price of diesel from the pumps pushes up the price of practically everything. In the UK, the majority of that price is tax which has been escalating since the 1980s, ostensibly to deter people from driving.

Likewise, there is a conscious effort to 'wean people' off fossil fuels, and the rising price of gas and electricity reflects the policy of successive governments who are forcing energy companies to use less efficient, pricier forms of power (obviously this is not helped by the fact that these companies are also greedy bastards operating in a sham of a market).

The same is true of alcohol and cigarettes, and it will be true of fizzy drinks, cheese and meat if the 'public health professionals' get their way. Someone who drives, smokes and drinks clearly will have a very different—and higher—inflation rate than someone who doesn't. None of these expenses are mentioned in the report above, perhaps because they are considered optional/sinful. And because they're optional/sinful, it's seen to be OK to tax them exorbitantly.

You will sometimes hear campaigners claim that the poor are the main beneficiaries of sin taxes because, having less money, they will be the first to cut down or give up and, therefore, get healthier/cut their carbon footprint/have more disposable income.

This is one of the great myths in public health that has endured despite decades—indeed centuries—of evidence showing the opposite. Tobacco is the starkest example because there has been a clear transition from smoking being equally popular across the social spectrum to it being—after 60 years of punitive taxation—much more prevalent amongst the poor. We know all this beyond a doubt. To continue pushing up taxes on undesirable products in the full knowledge that the poor are least likely to change their ways seems a little exploitative.

Sin taxes of this sort are based on a simplistic economic model of increased price reducing demand. It falls down because it does not take into account what price consumers place on the product themselves, nor does it take into account the social circumstances which lead people to using the product in the first place.

It has been a classic failing of middle-class crusaders in the past to target behaviour without understanding why people engage in it. More enlightened reformers have tackled the underlying causes and offered alternatives (the British temperance movement of the 19th century is a good example). But bone-headedness is more common, which is why you see this obsession with drink and tobacco advertising, even years after the latter has been banned. Unable to see the need for something in their own lives, they assume the lumpen proles have been lured in by those nasty corporations. Point out that these products were wildly popular before advertising was invented and you will be met with a glazed stare.

Sin taxes are always regressive. Even when they do reduce consumption somewhat, they still take proportionately more from the poor. This is shown very clearly by recent stats from the Office of National Statistics (click to enlarge). Whereas direct taxes (income tax, principally) take 24% from the richest and 10% from the poorest, the figures are almost exactly reversed when it comes to indirect taxes such as fuel duty, tobacco duty, VAT and alcohol duty.

I'm not saying that all taxes should be direct. I think there is a good case for charging people for what they consume as well as what they earn. And, as readers of my last book will know, I'm much more interested in making the poor wealthier than I am in reducing inequality per se (I don't think, for example, that the bottom quintile should be paying even 10% in direct taxes.)

But there are a lot of people who are very interested in reducing income inequality and they tend to be the same people who agree with sin taxes to coerce people into living their lives in a certain way. The two aims are simply incompatible. It's one or the other.


Curmudgeon said...

Tobacco duty is probably the most regressive tax of all - but you don't tend to hear the Left banging on about that when they say the tax system should be more progressive.

Indirect taxes have considerable advantages over income taxes as they are typically easier to collect, harder to evade and have less of a disincentive effect.

Fuel duty, much as we dislike it, scores highly on all three points.

Mark Wadsworth said...

"The two aims are simply incompatible."

But I would disagree 100% with Curmudge - general taxes on spending, i.e. VAT, are the most damaging of all, the hardest to define and collect, have the biggest evasion rates, they are the biggest disincentive to set up a business and they create massive distortions between exempt industries and taxable industries etc.

Mark Wadsworth said...

"The two aims are simply incompatible."

I meant to add "Exactly!" after that.

nisakiman said...

I would agree that indirect taxes, that is tax on consumption, is in essence a more efficient way of collecting tax, however the high tax on fuel has an escalating factor insofar as it serves to increase prices of any produce that has to be shipped (just about every consumable), which then attracts higher levels of tax / VAT as a result. I sometimes wonder what the real tax take from fuel duty is when all these factors are taken into account. It must be massive.

Snowdon is right to say that the burden falls most heavily on those that can least afford it. But of course, all the do-gooders are solidly middle to high income individuals who are unaffected by the punitive taxes on "luxury" items like tobacco and booze.

James Higham said...

To continue pushing up taxes on undesirable products in the full knowledge that the poor are least likely to change their ways seems a little exploitative.

... to say the least.

Trooper Thompson said...

As a lay Misesian, I feel I must point out that the proper definition of inflation is; an expansion of the supply of money and credit. This, ceteris paribus, will cause price increases.

As such, inflation (my definition), will tend to hurt the poor more, as any increase in their incomes will lag behind the price rises.

None of this contradicts the points made above.

Anonymous said...

We should note that 'The Enjoyment of Tobacco' has one virtue that few pleasures have. That is, that it can be enjoyed all day long. Is the enjoyment of tobacco ALL DAY LONG worse for the health than enjoying alcohol ALL DAY LONG? Or eating jam butties ALL DAY LONG? I have my doubts.