Call to change smoking and vaping taxes in South Africa
South Africa needs to strike a balance between the perspectives of both economists and health experts as to how tax rates should be determined for nicotine products, says Marius van Oordt, an expert in indirect taxation in developing countries.
Over the past several years, the world has seen an evolution of tobacco and nicotine products, particularly evident in electronic nicotine delivery systems (ENDS or e-cigarettes). To accommodate such a change, experts have been presenting contrasting views.
“To balance the perspective of economists and health experts, I argue[d in a recent paper] for risk-based tax rates on tobacco and nicotine,” said Van Oordt in his article for The Conversation. He added that “the idea of risk-based taxes is to set tax rates based on the risk to health of tobacco and nicotine by relying on scientific evidence.”
This analysis comes as the country reconsiders its design of taxes for tobacco and nicotine products through various bills. Particularly, nicotine and nicotine-substitute solutions in vaping products have been included in the tax net with a flat excise duty rate of R2.90/ml.
The economists’ arguments
The arguments of economists tend to sway towards their values of economic outcomes and individual liberty.
Van Oordt explained that economic theory dictates that if the true costs of producing and consuming nicotine products were included in their prices, consumers would have accurate information to make informed decisions. They could then decide whether they want to pay the actual cost (short and long-term) of consumption.
The theory outlines that the role of government “is to ensure that prices convey accurate information to consumers,” explained Van Oordt. He added that economic theory believes that “further government interference that restricts consumer liberty may give rise to negative economic outcomes, such as decreased productivity and, consequently, lower economic growth.”
Simply put, this view emphasizes that consumers tend to have better information to base their decisions on than the government.
Health experts arguments
On the other hand, health experts tend to put health outcomes above economic outcomes. By large, it is believed by these experts that tax rates on nicotine products should be set to deter consumption.
Health experts and economists also have different views on the role of governments.
Health experts believe that governments should limit negative health outcomes by deterring unhealthy decisions through bans, taxes and regulations. They argue that consumers often struggle to make decisions in their best interest.
Economists, on the other hand, tend to prioritize consumer liberty and may view “the unhealthy decision may be the optimal decision,” said Van Oordt.
Proposed alternative: Risk-based approach
“Governments face conflicting interests”, said Van Oordt. These conflicting interests include:
- Collecting sufficient tax revenues and limiting negative health consequences;
- Needing positive economic and social outcomes;
- Needing political acceptability (which often means lower taxes and valuing individual liberty).
“Risk-based excise taxes are an attempt to balance the interest of economists, health experts and governments,” argued Van Oordt.
Van Oordt said this particular approach takes into account both the perspectives of economists and health experts. Health costs are a significant portion of expenses that are not typically factored into product prices and differ depending on the product, as well as having tax rates that are based on the health consequences – which considers both sides.
He said it also considers the interests of the government by proposing higher taxes on goods that pose greater health risks, with tax rates that align with positive economic and social outcomes, as well as lower taxes on low-risk alternatives.
Overall, its main objective is said to be to improve individual decision-making by providing accurate information in the market, enabling prices to reflect health costs while minimizing constraints on individual liberty.
“South Africa represents an interesting case for applying risk-based taxes,” said Van Oordt. Having the “highest income and wealth inequality in the world and an under-performing public healthcare system, together these have resulted in a high prevalence of non-communicable diseases that disproportionately affect low-income individuals – most of whom are victims of past institutionalised racial segregation.”
To address this, Van Oordt said that “it requires additional tax revenues to fund healthcare and redistribution, among others, while facing severe economic constraints, such as an unemployment rate of over 30%,” thus arguing that risk-based and not broad tax rates on tobacco and nicotine products may be South Africa’s best bet.
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