As I have repeatedly been saying, people’s actions are guided by incentives. Raising taxes, such as the Sin Tax, reshape people’s incentives. And people respond to a change in the tax environment based on the elastic relationship between rates of taxes and the levels of revenues from such rates (Laffer Curve). Such variability in people's reactions usually goes in the opposite direction from the expectations of the government and their favorite ‘tax, economic and finance’ experts, as well as, the consensus who thinks in linear terms.
And because taxes don’t have “neutral” effects on people’s behavior, the result has been a policy boomerang.
I have noted incumbent domestic politicians have used the moral platform (supposedly to prevent or reduce vice) as pretentious cover to justify “Sin taxes” on what truly has been political greed—insatiable deficit spending.
Part of the linear thinking expert advisory group has been the IMF whom has endorsed such repressive taxes.
I have pointed to the US experience where 'Sin Taxes' caused widespread smuggling. Not only in the US, in the United Kingdom, alcohol sin taxes has prompted for increased health problems and a booming informal or shadow economy.
Yet like all prohibition laws, quasi prohibition decrees like the sin taxes fail to reduce alcohol or cigarette consumption.
One might add as a way to get around such regulations, sin taxes promote corruption
Now the unintended effects of the Philippine version ‘sin tax’, from the Inquirer:
Blame it on the law of unintended consequences.
When the Aquino administration pushed Congress to raise the level of “sin taxes” on tobacco products last year, cigarette manufacturers argued that higher levies would create new problems for the government, like smuggling.
According to them, the resulting increase in cigarette prices would give more incentives to unscrupulous parties to smuggle in cheaper brands and meet the demand from less affluent buyers.
Today—almost one year into the effectivity of the Sin Tax Reform Law—their warnings have proved almost prescient.
Information provided by the country’s largest tobacco manufacturer showed that the government may have lost as much as P4.4 billion in tobacco excise taxes in the first semester of the 2013 alone.
The first series of the two part article puts the blame of the tax loss burden to a single company. And as usual, the mainstream excuse has been one of regulatory lapse (and scheming entrepreneurs) rather treating such as a political economic phenomenon.
As a side note, the mainstream's solutions to social problems can be simplified in 4 ways: throw money at the problem, replace the perceived delinquent authority/ies, and for the politically incorrect entities, apply or increase regulations or impose prohibitions and lastly implement taxes for the other groups. There hardly has been the perspective where these solutions can be or have earlier been the source of the problem.
Yet another article suggests that there has been an explosion of cigarette smuggling. Recently, Php 18 billion pesos worth of Marlboro cigarettes has reportedly been seized by officials. In addition, according to the same report sales of tobacco companies plummeted by 40% during the 1st quarter of 2013 resulting to a decline in tax collections
And all the above symptoms—shadow economy, smuggling, lower revenues, failure to stem vice/s, greater health hazard (from counterfeit or low quality products)—of sin taxes captured by this opinion column from the Inquirer
The high tax regime has been in force since January. Has it forced smokers to quit? No. Has it pushed street prices of cigarettes high enough to make smokers quit? No. Has the government been able to collect more taxes? Still no.
Worse, what Filipinos are smoking now is much more harmful to their health than what they used to smoke. What happened?
Smuggling. When the “sin tax” was being crafted, this column warned that cigarette smuggling would flourish, as had happened here before and in other cities when taxes were raised drastically. It is happening now.
Smuggled cigarettes sell for P1 per stick, less if you buy by the pack. They are sold out in the streets, in sari-sari and convenience stores everywhere with posters that scream “low prices!” at every passing man, woman, and child.
Unfortunately, smokers who can buy cheap cigarettes tend to smoke more and are not financially motivated to quit. Already, 25 percent of Filipino smokers of higher-priced premium and subpremium brands have shifted to the smuggled P1 brands.
In the Philippines’ 100-billion-stick market, that translates to 25 billion sticks or 1.25 billion packs that should have been taxed at a higher rate of P25 per pack, instead of just P12. The government is losing about P16.3 billion in taxes per year.
Statistics show that contrary to expectations, the smoking rate among Filipinos has not subsided since Republic Act No. 10351 was implemented.
It has gone up instead. The average daily consumption has grown from 13.5 sticks per smoker in the first quarter of the year to 14.1 sticks per smoker in the second quarter.
The increment may be slight but it is certainly puzzling. The reason is the raging popularity of cheap smuggled cigarettes.
Philosopher George Santayana once warned about people who don’t learn from past as doomed to repeat the same errors.
Obviously politicians and their apologists can hardly ever grasp that populist feel-good noble-sounding repressive policies such as the sin taxes (which really have been engineered to generate votes or approval ratings) have been bound for failure from its inception.
This reminds of me of the fatal conceit by politicians who believe that they can subvert the basic laws of economics.
Even in the 18th century Scottish philosopher Adam Smith recognized this which he branded as the "man of the system" (Theory of Moral Sentiments, Part VI Of the Character of Virtues)
The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder.
At the end of the day, it is society who carries the load or who pays for the costs of failed experiments by political authorities. This is why the same errors have been recycled through time.