A new book from Imperial College Business School's Centre for Health Economics & Policy Innovation and the World Health Organization tells us exactly why policymakers should care about health taxes
Back when authorities had no desire or need to change peoples’ habits, levies on alcohol, tobacco and sugar were dubbed “sin taxes”. In the 18th century, pioneering economist Adam Smith wrote “sugar, rum, and tobacco are commodities which are nowhere necessaries of life… and which are therefore extremely proper subjects of taxation.” And as long as people continued to pay the extra, leaders were happy to collect the money.
Today, we know the importance of what we consume. Diet, for instance, is the leading risk factor for chronic disease, while food production is the largest single contributor to greenhouse gas emissions.
Could taxes be improved and applied to modify our tastes, encourage better lifestyles and spark innovation from industry? Are governments missing a valuable opportunity that could promote healthier choices and help control emissions?
Our book proposes a new role for taxation. We advocate reversing traditional logic and using tax to prompt changes in behaviour, causing less harm to health and the environment, which are intertwined. By selectively taxing products that are most harmful, possibly cutting taxes on healthier choices, authorities can offer individuals a visible and powerful incentive to change what they consume. But these taxes must be well designed and applied correctly to produce the intended effect.
Health taxes in action
Today, we have already achieved this with hefty taxes on tobacco – the World Health Organisation recommends a minimum 75 per cent tax on tobacco retail prices – and EU guidelines specify a tax of at least 60 per cent of the retail price. We know high taxes here work, and have been a major cause of a fall in tobacco consumption around the world.
Where higher taxes have been applied to alcohol and non-alcoholic sugary drinks, effects are possibly less visible than those on tobacco, but still significant. Governments are particularly keen to deter certain, vulnerable parts of the population – such as young people – who are often more sensitive to price changes and more easily discouraged by higher taxes. Meanwhile, the heaviest drinkers are not very sensitive to price rises, but they gain the most, even from small changes.
But it’s the tax on sugary drinks, although often small and applied in fewer countries, that offers an important breakthrough. This is the first tax explicitly designed to change people’s behaviour, backed up by a health rationale. By contrast, longstanding taxes on tobacco and alcohol were originally designed for reasons that had little to do with health.
Taxes can also be designed to encourage manufacturers to change methods and ingredients
Here, the UK’s design of a sugary drink tax has not only cut consumption, but also motivated manufacturers to cut the amount of sugar they add to soft drinks. Many other countries are beginning to use the same approach: Hungary has applied taxes to foods that are high in calories and low in valuable nutrients, as well as sugary drinks, and authorities in the Philippines have successfully used health taxes to help fund their health system.
In 2023, the UK government plans a radical overhaul of tax on alcohol, with higher taxes applied to drinks with higher alcohol content – which could spur innovation from drinks companies.
But because taxes take time to produce effects on health, researchers tend to measure how they reduce consumption, and rely on modelling to examine health impacts. To prove their worth, economists and academics must also counter the louder voices of powerful industrial lobbyists who demand direct evidence. But this is difficult to gather in the face of complexity and without a reliable comparator for nationwide policies.
Introducing health taxes that work
To be effective, taxes must be well designed and deftly applied. France, for instance, applied a tax on soft drinks that did indeed raise revenue, but that was too insignificant to change people’s behaviour – as a health measure, it was no use.
And counter to traditional logic around taxation, these health taxes must be clearly visible to consumers through tactics such as food labelling. Just as important as the tax itself is the message that accompanies it: a product is targeted because it’s not healthy. The graphic images and health messages that adorn cigarette packets prove the efficacy of labelling. Taxes can also be designed to encourage manufacturers to change methods and ingredients.
Not all governments have the political capacity to implement taxes with health benefits in mind. Some depend heavily on tobacco tax, which might make up 10 per cent of their entire tax revenues, and so must proceed with caution. For countries with lower levels of income, the degree of complexity required to design and implement health taxes increases significantly.
Longstanding taxes on tobacco and alcohol were originally designed for reasons that had little to do with health
There is criticism too that such taxes might be regressive: this isn’t the case with alcohol, where consumers tend to be wealthier, but certainly so with tobacco and sugary drinks. With the latter, the cost of the tax on sugary drinks for lower income households in the UK adds up to an estimated £8 a year. There are cost benefits too of reducing tobacco consumption: research shows people who cut down or quit become healthier and more productive, offsetting any extra tax burden.
Health policy is complex. But we are beginning to have a clear understanding about the opportunities presented by skilfully designed taxation. The idea consumption taxes should collect revenue without changing behaviour is no longer in line with today’s world.
A third of all tax revenues in OECD countries come from consumption taxes, yet we know this consumption causes huge societal problems in our health and in the environment. If we don’t open the door to more radical approaches to taxation, such as a new use of VAT on certain foods and drinks, we are wasting a great opportunity for change.
This article draws on the contents of Health Taxes: Policy and Practice, a book from Imperial's Centre for Health Economics & Policy Innovation and the World Health Organization.