Tuesday, 4 March 2014

The virtues of sin taxes

By Janice Heng, The Sunday Times, 2 Mar 2014

If reactions on Facebook are anything to go by, what caught the attention of many in last week's Budget was not the $8 billion Pioneer Generation Package.

Instead, it was an announcement at the tail end of the speech: higher taxes on alcohol, cigarettes and betting.

Taking the hardest hit was booze, with the liquor tax up by 25 per cent to $88 per litre of alcohol content for wine and spirits, and $60 per litre of alcohol content for beer with immediate effect.

Some of those who drink, smoke or gamble - and I count myself in the first group, at least - are understandably upset.

Yet raising these so-called sin taxes is arguably one of the better revenue-raising options as Singapore seeks to fund increasing expenditures especially in the social sector.

First, although the move may be unpopular with those it targets, it is hard to argue against it for non-selfish reasons.

A common objection to higher income or wealth taxes, for instance, is the fear that they might reduce incentives to work and hurt competitiveness if high-earners take their money elsewhere.

We can question how realistic these fears are, but they are at least understandable.

Meanwhile, one objection to raising the goods and services tax is that such a move is unquestionably regressive. The GST is a tax on general consumption, and low-income earners spend a larger proportion of their income on consumption, so they are hit harder.

But what arguments are there against higher sin taxes? Some have said that the Government should not interfere with people's consumption decisions.

If a drinker or smoker wants to harm his health, or a gambler his finances, that is his prerogative, goes the argument.

Besides, who is to say that such behaviours are necessarily always harmful? An occasional flutter does not mean financial ruin, while a glass or two of red wine may even have health benefits.

Such objections, however, apply only if we see higher sin taxes as a purely paternalistic move.

Yet the aim of discouraging such behaviours should not overshadow another important aim: raising more revenue.

The higher cigarette taxes are expected to net an extra $70 million a year. This is more than enough to cover, say, the annual $30 million bill for this year's initiatives to support people with disabilities.

The alcohol duties will bring in another $120 million more a year - almost enough to meet the $123 million cost of improved subsidies for specialist outpatient clinics.

And the gambling taxes will bring in $255 million more, an amount which could cover both the $147 million in increased bursaries for institutes of higher learning and the $27 million cost of enhanced tax relief for those supporting parents and grandparents.

In short, sin taxes deserve to be recognised for their role as revenue sources, not just decried for their paternalistic overtones. And this role is one that may only get more important as Singapore strengthens its safety nets.

Before the Budget, some speculated about more progressive tax changes. The threshold for the top income tax bracket, for instance, could be lowered so that it applies to a larger pool of high-earners.

Taxes on wealth, including assets such as property and cars, could also go up. These moves would hit the rich harder and thus have a redistributive effect, in line with efforts to tackle inequality.

Such tax changes did not come to pass. But they might well feature in future Budgets. Last year, Deputy Prime Minister Tharman Shanmugaratnam said Singapore would "preserve and build on (its) progressive system of taxes and subsidies in future".

Some might object, pointing to another option: raising the ceiling on the net investment returns contribution. This is the amount of investment returns on the reserves that the Government can tap for its Budget.

The Government is currently allowed to take up to half the net investment returns on net assets managed by the GIC and Monetary Authority of Singapore, and up to half the investment income from remaining assets, including Temasek Holdings.

Why not just raise this limit and fund more public spending that way, some might ask. Well, that is a possible option. But just because this option exists doesn't mean that we should dismiss the possibility of raising taxes.

After all, a more progressive tax system makes for a more equitable society. On a purely self-interested level, I won't be cheering the higher prices of booze if retailers pass the higher taxes on. But if income and wealth taxes go up, thus helping to address inequality, I'd happily drink to that.

Why liquor duties were raised by 25%

OUR liquor duties are aimed at moderating the consumption of alcohol, given the social costs associated with excessive drinking ("Puzzled by hefty rise in alcohol tax" by Mr Trent Ng Yong En; Tuesday). The duties have to be adjusted from time to time to ensure that their effectiveness is preserved.

The last effective liquor duties hike was in 2004. The increase of 25 per cent announced in Budget 2014 broadly reverses the decline in the effectiveness of the duties over the past 10 years, as incomes and purchasing power have increased while the liquor duties have remained largely unchanged.

Excessive drinking remains a problem and more young people are drinking. The incidence of alcohol-related diseases such as liver cirrhosis has also increased over the last decade.

The increase in duties also complements our broader efforts to curb the drinking habit through public education efforts starting in schools and our liquor licensing regime.

Mr Ng also asked why the duties hike was larger for liquor (25 per cent) than for tobacco (10 per cent).

Tobacco duties make up a higher proportion of the price of cigarettes, compared to alcohol. Hence, the 10 per cent increase in tobacco duties will raise the retail price of cigarette packs by about 5 per cent to 8 per cent, similar to the impact of the increase in liquor duties on liquor prices.

We are also mindful of the increased risk of contraband cigarettes if the duties are too high. The duties are once again part of the broader effort to discourage smoking, such as through restrictions on the places where smoking is allowed and on advertisements and display of cigarettes, and through education.

We thank Mr Ng for his views and assure him that adjustments in duties will continue to be carefully considered.

Lim Bee Khim (Ms)
Director, Corporate Communications
Ministry of Finance
ST Forum, 1 Mar 2014

Puzzled by hefty rise in alcohol tax

I AM puzzled by the hefty 25 per cent rise in alcohol tax, compared with the more modest increases in cigarette levies (10 per cent) and betting duty rates (from 25 per cent to 30 per cent) ("Alcohol suffers stiffest hike among 'sin taxes'"; last Saturday).

Finance Minister Tharman Shanmugaratnam said the move is "in line with our social objective of avoiding excessive consumption or indulgence in these areas".

Even if the tax hikes can be justified, what is the reason behind the big difference in increases?

Surely, tobacco is more damaging to health than alcohol, assuming a moderate consumption of both.

Red wine and certain tonic liqueurs, when drunk in moderate amounts, can generate health benefits, whereas smoking offers no health benefits whatsoever.

The Government has often advised moderate and responsible consumption of alcohol, while encouraging people to quit smoking, even as it imposes smoking bans at more places.

Hence, the significant difference between tax increases for alcohol and tobacco appears to contradict the Government's stance on drinking and smoking.

Trent Ng Yong En
ST Forum, 25 Feb 2014

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