Taxing Sin in the 'Nanny State'

Sin may have been with us since the Garden of Eden, but the taxation of sin is a more recent phenomenon. Early examples include the Beard Tax of 1698, introduced by Peter the Great to westernize the look of Russian men, and the 1791 "Whiskey Tax", imposed to pay off debt from the American civil war, which in turn led to insurrection.

Sin taxes are excise taxes levied on the production and sale of products, or on activities, seen as harmful or undesirable for individuals or society at large. Generating revenue for governments ostensibly to decrease consumption, there is the added attraction that taxing the vices of others can prove popular with those who do not indulge. Such taxes are not without criticism, however, with concerns over their regressive nature and widespread cries of "Nanny State". Sin taxes may also encourage other undesirable activities such as illicit trading and the smuggling of goods.

So what are the most popular sin taxes and can they be avoided? Alcohol, fuel and tobacco products are well established and lucrative targets, but so increasingly are foods, with the introduction of fat and sugar taxes in the fight against obesity. Restraint reduces the impact of these lifestyle taxes of course, but, for the weaker-willed, a careful decision on where to live, or holiday, can also lessen the burden. Publication of the first edition of the Nanny State Index may just have made this second option that little bit easier!

Published March 31, 2016, by the Institute of Economic Affairs (IEA) and the European Policy Information Center, the Nanny State Index scores each of the 28 European Union Member States according to its regulation of lifestyle choices on alcohol, food and drinks, e-cigarettes and tobacco. Using 32 different criteria, the resulting league table provides a snapshot of the "best and worst places in the EU to drink, eat and vape".

Top spot goes to Finland scoring 53.7 points for a range of taxes on food and drink, restrictions on advertising, an effective ban on e-cigarettes and the prohibition of "happy hours". Chocolate, fizzy drinks and ice cream attract a sin levy too. Third in the table, just behind Sweden, is the U.K. on 35 points and boasting the highest tax rates on wine and cigarettes in the EU. According to the IEA, the U.K. comes out top for tobacco regulation, and the duty on beer is second only to Finland.

Mid-table are Croatia (22.2 points), Poland (20.7 points) and Slovenia (19.9 points), with Germany and the Czech Republic falling into the relegation zone with a lowly 9 and 8.8 points respectively. The research shows that Germany has one of the lowest beer tax rates in the EU, below average taxes on spirits and no sin tax on wine. Likewise, the Czech Republic has low taxes on beer and spirits and does not place a levy on wine. The taxation of tobacco is also amongst the lowest in the EU.

From a U.K. perspective, Christopher Snowdon, Head of Lifestyle Economics at the IEA, sums up the situation saying: "Britain is the third worst country in the EU for lifestyle freedoms. Only Finland and Sweden are worse places to be a drinker and nowhere is worse to be a smoker. The UK's only saving grace is its liberal approach to e-cigarettes but all in all the results make depressing reading for those of us who want the government to keep out of our private lives. Unless you are a teetotal, non-smoking vegetarian, my advice is to go to Germany or the Czech Republic this summer."

So do sin taxes change our behavior for the better as proponents claim, or do they merely enhance the flow of revenue? According to the IEA, "Although paternalistic laws are often said to be justified on health grounds, analysis of the figures found no link between nanny state regulation and longer life expectancy. Countries with heavy regulation of alcohol do not have lower rates of drinking, and countries with heavy regulation of tobacco do not have lower rates of smoking".

The use of sin taxes by politicians to change behavior can certainly create inconsistencies: for example, driving consumers from soft drinks containing sugars to those using artificial sweeteners on public health grounds, when leading substitutes such as aspartame are subject to controversy themselves. So too with the obesity busting sugar tax planned for the U.K. in 2018. Although campaigners were delighted by the announcement of the GBP500 million a year levy, the targeting is off-center with health experts highlighting the exclusion from the tax of pure fruit juices which can contain as much sugar in a single-portion carton as a child’s daily recommended intake. Bizarrely, the exemption of milk-based drinks from this tax will allow chocolate milkshakes and hot chocolate to remain unscathed too.

Mexico is often cited as a shining example of the successful taxing of sin. Research published by the BMJ in 2016 attributes the introduction of a 10 percent sugar tax in 2014 with a 12 percent reduction in the sale of sugar sweetened drinks, together with a 4 percent increase in untaxed drinks. As always, there is a flip side to the coin, with Denmark scrapping a controversial tax on saturated fat in 2012 after little more than 12 months. The tax had a limited effect on consumption as many Danes took to crossing into Germany for their shopping. Businesses complained of increased administrative costs, jobs were lost and the tax led to increased inflation. So painful was the experience that a proposed sugar tax was shelved.

As Benjamin Franklin wrote in 1789, "nothing can be said to be certain, except death and taxes". As governments grapple with budgets sin taxes are here to stay, but at least now sinners can be a little more informed when making lifestyle choices!

By Robert Walker, Senior Editor, Global Tax Guide

Access even more in-depth analysis and expertise with a free trial to the Premier International Tax Library.