The argument for sin taxes is frequently made. Arguments against sin taxes, however, are rarely discussed, and never feature in the National Treasury’s budget speeches.

Everyone expects further hikes in sin taxes on products such as tobacco, alcohol and sugar in Wednesday’s big Budget Speech. While better-than-expected (though still dismal) revenue numbers might stave off the spectre of hikes in income taxes, corporate tax, or even VAT, excise taxes are always considered fair game.

The argument for sin taxes is simple. Basic price theory suggests that raising the price of something will reduce demand for it. Since reducing tobacco and alcohol consumption is a long-term health policy goal, ever-rising taxes on these products should support this policy.

It is generally accepted that it does, to some extent. For every percentage point rise in the price of alcohol, consumption declines by about half a percentage point. It is more difficult to discern the effect of taxes on smoking, since there are many confounding factors in assessing the effectiveness of the modern cornucopia of anti-smoking policies.

The other argument is simply that levying sin taxes is easy money, and therefore ought to be exploited by the Treasury in support of its revenue targets.

Alcohol abuse

There is a general negative correlation between alcohol pricing and consumption, but the impact of increased prices is less strong among younger drinkers and heavy drinkers – which are exactly the populations that alcohol policy ought to be targeting. This suggests that pricing is minimally effective, and far from a sufficient policy tool to reduce problems associated with alcohol abuse.

In South Africa, according to the WHO, alcohol consumption per capita declined from 10.5 litres of pure alcohol per person in 2010 to 9.3 litres per person in 2016. While that sounds like a lot of heavy drinking, this puts the country on a par with Argentina, Canada, Chile, Spain, Sweden, and the US. Australians, Russians, New Zealanders, and Brits drink more than we do, and the French, Germans, Irish, and Portuguese drink much more.

Only 40.6% of South Africans drink, which is worse than in other African countries, the Middle East, India, and Indonesia, many of which have large Muslim populations. However, it is significantly better than in China (44.1%), Brazil (57.7%), Russia (67.8%), the US (68.9%), Canada (77.1%), Germany (80.3%), the UK (83.9%), Australia (84%), and France (94,8%).

While the WHO reports that 43.4% of liver cirrhosis deaths, 25.2% of road traffic fatalities, and 2.8% of cancer deaths can be attributed to alcohol in South Africa, in nominal terms, that amounts to fewer than 10,000 deaths in total per year.

These numbers suggest that perhaps South Africa’s supposed alcohol problem is not as severe as is often suggested.

One paper from 2018 that received a lot of media coverage claimed that approximately 62 300 adults died from alcohol-attributable causes in South Africa in 2015, which would account for more than 10% of all annual deaths.

However, this number is hard to reconcile with the far lower number (albeit of only three causes) reported by the WHO. It turns out that the study got its alcohol-related mortality data from a survey conducted among 85,000 people living in rural Kwazulu-Natal, around Mtubatuba, north of Richards Bay. This seems like a poor sample from which to extrapolate to the entire South African population.

Tobacco use

About 19% of South Africans over the age of 15 smoke. This is higher than in Australia, Brazil, Canada, India, and the United States, similar to the UK, lower than in China, and much lower than in most of Europe, where about 30% of the population still smoke, or Russia, where the rate exceeds 40%. South Africa’s smoking rate is lower than the global average of 20.6%.

Despite the fact that South Africans probably deserve a little distraction from the disastrous economic slope down which the ANC is leading it, should they so choose, the smoking rate in South Africa is far from high.

Still, our government is infested with nanny-state control freaks who will do anything they can to make life miserable for the country’s remaining smokers. That includes, as we have seen, imposing an entirely unscientific prohibition on tobacco products, justified by the false claim that ‘smoking can increase your chance of getting Covid-19’. It doesn’t. (On the contrary, it is somewhat protective against contracting the disease.)

Smokers seem to be even less amenable than drinkers to public policy that tries to discourage them from smoking. During the prohibition on tobacco products, cigarettes remained easily accessible, but at dramatically higher black-market prices.

I personally witnessed a 1 350% price increase at the darkest time of the prohibition, before black market supply began to catch up with demand. By the end of the prohibition, black market prices were about twice the usual retail price. On average, prices increased by 250% during the ban.

Despite this astronomical price increase, only 9% of smokers quit during the ban, and 93% of continuing smokers purchased cigarettes despite the sales ban, according to a paper by Samantha Filby, Kirsten van der Zee, and Corné van Walbeek, of the Research Unit on the Economics of Excisable Products at the University of Cape Town School of Economics. (That these numbers don’t add up to 100% can be accounted for by an overlap involving people who bought cigarettes early in the prohibition, but later quit.)

This suggests that smokers are particularly price-insensitive, which casts doubt on the value of excise taxes as a means to discourage smokers.

Small change

In total, the government receives about R50 billion from specific excise taxes. According to the aforementioned Van Walbeek, speaking to Moneyweb (paywalled), sin taxes in a normal year generate about R14 billion of revenue for tobacco, R25 billion to R30 billion for alcohol, and R3 billion to R4 billion from the recently imposed sugar tax.

This sounds like a lot, especially when government is whining about where to find R20-odd billion to pay for vaccines, but it isn’t, really. Against the 2020 Budget (pre-Covid), that represents a mere 2.8% of the government’s total revenue.

Higher-than-expected tax paid by the mining sector alone closed the expected revenue shortfall announced in the 2020 Medium-Term Budget Policy Statement by more than R100 billion, which dwarfs the contribution of sin taxes.

In total, the prohibitions on alcohol alone cost the economy between R36.3 billion and R51.9 billion, depending on who you believe, and cost the fiscus some R8.7 billion in lost taxes.

Unseen impacts

The 19th century economist Frédérick Bastiat once wrote a brilliant pamphlet about the seen and the unseen effects of public policy. With sin taxes, there are also seen, and unseen effects.

The obvious effects are that people pay more for the goods being taxed, and are therefore encouraged to buy less of it, and that the government squeezes a little more coin from defenceless citizens.

The unseen effects, however, show up in lower revenues for retailers, bars, and restaurants. That, in turn, affects revenue further up the production chain, from manufacturing to packaging, transport and mining. It also affects rents, as well as wages and employment.

There is little data available on the impact of sin taxes on employment. A 2017 study tries to model the effect of alcohol taxes on job losses in the industries directly affected, as well as on the other industries that might be expected to benefit from disposable income that otherwise would have been spent on alcohol. Surprisingly, it finds that there is a net employment gain, although that gain includes not only private sector employment, but also the additional government jobs created by the tax revenue.

The problem with this analysis is that it was conducted in a country (the US) which is very near to full employment, and where the job market can easily absorb those displaced from the alcohol sales business. Whether this would happen in South Africa, with its catastrophic unemployment levels, is highly doubtful.

Taxes on alcohol and tobacco are also highly regressive. Both are consumed in greater quantities by people on the lower end of the income spectrum. While the rich can afford paying a little more for their favourite tipple, this is not true for the poor. Sin taxes therefore divert money that could have been spent on food, education, or clothing to the government.

Illicit market

The biggest impact of the prohibitions on alcohol and tobacco was to boost the illicit market. According to SARS commissioner, Edward Kieswetter, the organised crime syndicates that added alcohol and tobacco to their usual portfolio of hard drugs, protection, weapons, and prostitution, now have a foothold with otherwise law-abiding citizens, and the impact will take years to reverse.

Raising sin taxes has a similar, albeit less severe, impact on the market. The more expensive legitimate products are, the more attractive less expensive illicit products become.

A well-developed illicit market poses a number of threats to the country. Consumers are more likely to be exposed to low quality, or even toxic, products. Money is diverted away from legitimate, tax-paying businesses, further reducing the government’s own revenue. Money flowing to organised crime syndicates fund all sorts of undesirable activity, from gang warfare to human trafficking.

A friend I recently spoke to said he was very uncomfortable with the idea of supporting the nefarious activities of the black market, but between his lockdown-battered income, the tobacco ban, and his 40-a-day addiction, he was forced to turn to the illicit trade, and hasn’t looked back.

Fiddling at the margins

Another unseen effect is that as long as government thinks it can squeeze more blood out of the sin tax stone, it is under correspondingly less pressure to get its financial house in order.

According to the Centre for Risk Analysis, a Johannesburg-based risk advisory group, the budget deficit expected for the next few years rivals only the deficits during the two World Wars and the final days of Apartheid isolation. Tax revenues approaching 30% of GDP are the highest they’ve been since 1994, but government expenditure is rising even faster. Meanwhile, the composite leading business cycle indicator, which showed its biggest sustained rise during the Mbeki era, has been flat or declining ever since.

This cannot last. Plugging small holes in the budget by raising sin taxes merely postpones the inevitable reckoning. Government needs to dramatically restructure itself, not fiddle at the margins.

Instead of raising sin taxes, the government could give the battered retail and hospitality sector a little relief by slashing them. The benefits of sin taxes, both in promoting healthier lifestyles and in revenue generation, are marginal.

Meanwhile, they cause significant harm to an economy that desperately needs to recover, if it is to grow enough to pay the ballooning public debt and create meaningful employment.

Now, more than ever, government should jettison all anti-growth policies instead of doubling down on them. There are bigger issues, but sin taxes really cannot be justified in the present economic climate.

The views of the writer are not necessarily the views of the Daily Friend or the IRR

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33 COMMENTS

  1. Ivo, with respect, since your articles are great, this one is “fiddling at the margins”. Tax itself is a sin.

    • Getting more to the point, good job. The burden of proof lies with Ceasar to defend his taxation in the first place, not with the unwashed masses to try and defend against them.

      • Well written very informative and enjoyed the read.Just remember commies dont use logic in decisions they make, so dont look for the logic.Like you said the tobacco ban last year was not based on any science was just Kopdoeks opinion and the collective went went with it.

    • Agreed. Ivo’s article is very well-balanced with great data, but if one starts at a different premise, i.e. tax is a sin, then it would give the article a different dimension.

      What is true is that a ‘sin tax’ does nothing except extract hard-earned cash from the people.

  2. What a shame that my dog will give you a bigger reaction if you read this to him aloud than would any politician or SARS bigwig. They simply do not care about logic or basic 101 economics. For all the knowledge out there, contained in this writing, facts, lessons learned and school fees paid in the past by other countries, our outstandingly corrupt and extremely oblivious politicians seek to redesign the wheel every day.

  3. Besides the plain and simple truth that taxation is morally repugnant and indefensible for as long as it is involuntary, it is even more egregious to employ taxation as a source of revenue. Taxation is not revenue. We are told that taxation is a necessary evil, but that those in charge can be trusted (I can barely contain my laughter as I type this) to spend that money on us better than we can essentially spend our own money on ourselves or our communities.

    Taxation is theft. Taxation is meant to support government – and therefore should not be a source of revenue. There is moral hazard in any venture where those who get a blank cheque have no skin in the game to ensure transparency and responsibility regarding how much they fill in the blank spaces, or what they spend it on, or feel any repercussions when say they buy railway coaches that don’t even fit on the railway lines. Seriously, you had one job. Seriously, go lie down on those tracks instead of fleecing us for more ‘sin tax’. And the joke is due to the negligence and malfeasance in those very chambers, it’s probably entirely safe to lie down on those tracks.

  4. The problem with statistics is that you can have your head in the oven and your feet in the fridge and your lifeless body will have an average temperature.

    But lets talk about sin tax and the illicit trade and the real elephant in the room…lack of enforcement.
    You have reach a very dangerous point when the outcome is such that we can’t tax the sinners because the devil might gain from it.
    South Africa’s problems(you can go back and blame oom Jan if you wish) start with the lack of law enforcement. Corruption, theft, illicit trading, tax evasion (individuals and specifically corporates with their transfer pricing models) all contributed to the financial strife the country is in. If law enforcement was effective the illicit trade would not exist to the extend it does today and your 40-a-day mate would have two choices, change his habits or pay up. The same goes for the dozen beers a day crowd. I live in a country where it is horrendously expensive to smoke and still you will find those that does. The same goes for alcohol. People drink but drinking and driving is not on. But then again we have a safe public transport and a clean and safe taxi industry.
    Fix law enforcement and many of your problems will be solved.

    • If by fixing law enforcement you mean disbanding the police, then I agree with you. Our police force is the main problem in many if not all cases of crime. Ranging from losing their guns, to renting out their guns, to shaking people’s pockets with unconstitutional stop and search tactics, I’m afraid I would rather take my chances with the alleged criminals than the career criminals in uniform.

  5. I wonder what is meant by the last clause in Ivo’s sentence: “Only 40.6% of South Africans drink, which is worse than in other African countries, the Middle East, India, and Indonesia, many of which have large Muslim populations.”

    • Simply that majority Muslim countries are likely to have low drinking rates because of religious rules, so they’re not a good comparator.

      • Neither is South Africa, where cultural norms dictate that a large swathe of African women don’t drink. So the South African drinking statistics are actually quite high. It would be better to compare South Africa to a country where 40% of the population is Muslim, instead.

  6. Marcell, your example re stats is also supported by the old USA study that came to the conclusion that bowls was the most dangerous sport since the most people died in bowls whilst partaking in it than any other sport – the facts that those deaths were from strokes and heart attacks were not considered as contributing – it reminds me of all the covid death numbers where people who died in car accidents were also counted as covid deaths.
    During the tobacco ban, Dhlamini-Zuma at least made her Edward Zuma a multi-billionaire due to the illegal cigarettes that he sold locally from his KZN Factory.
    This factory at KZN has more security guards at the factory than what Joe Biden had at his virtual inauguration, so law enforcement either directly or due to tax evasion reasons steer clear of even going near to it.
    If only the current ruling government would spend more of their energy on implementing rational efforts on improving the lives of their citizens and not their own immediate family members and comrades, as well as becoming more efficient in their daily tasks at government-owned enterprises and take decisive actions in closing down entities like SAA, Postal Services, etc. that are just stealing hard-earned tax monies, this RSA could have been the STAR OF AFRICA and not the current “sh1th0le” in Africa as Trump famously stated some years back. He has been proven to be right in his assessment, at least as far as the current situation in the RSA is due to the infested corruption-orientated high percentage of government officials are concerned.
    Yonks ago, when VAT was first introduced in the RSA, I stated that the 4% VAT that was levied at everything, they should have spent more time on implementing procedures in have HONEST inspectors to investigate the financial records of businesses and do away with personal taxes and make VAT a 20% tax, except for the staple food (i.e. food products that are nurtured and grown by farmers with their and their labourers’ blood, sweat and tears). In addition SARS could re-train their personal tax clerks to become company tax inspectors (auditors) and those that could not make the transition, redeployed become cleaning staff at public hospitals, universities, etc.
    Oh how rich the RSA and its citizens could have been today if only they did that, but then alas your IQ would have had to be above 70 to create some practical plans to elevate everyone in the RSA and to make it a profitable investment haven for the world – Just think how we all could have stated in full truth “PROUDLY SOUTH AFRICAN”.
    Alas, now currently not even the Russians are interested in the RSA, nevermind any other foreign investment company – only the Chinese are interested in sending more of their overpopulated citizens to Africa to alleviate their own over-population and the fleece the RSA (and rest of Africa) more and more. The irony is that now the USA has become a more profitable country for the Chinese to suck dry with Biden’s inauguration. So even here, we are losing out.
    What the current fraud-invested government officials do not understand is that even though they can buy all the luxury vehicles on offer in the RSA, one of these days they will not even have proper roads for it to be driven on – they should rather invest in buying proper 4×4’s as most of the Gautengers have started to invest in, even for their wives just to deliver their kids to school – but even here the IQ-level is too low.
    ‘Nuff said

  7. It is a known fact that putting political power into the hands of the poor and uneducated is like tying torches to the tails of foxes and letting them loose in the ripe corn fields! Regardless of all comments and point of views re SA politics, we are reaping what we sowed and still sowing!

  8. The factor left out here is the reason why the ban on alcohol and cigarettes was/is important to the ANC.
    There remaining voter base is predominantly black females. This is why the focus on GBV is so important and the part alcohol plays in this. How many black female smokers have you seen?

  9. ‘Sin taxes do not work’.
    The UK has some of the most expensive booze in the world. It is cheaper for me to buy a bottle of Chivas Regal at Makro in RSA than to buy it from a liquor store in Scotland (It gets sent to England first to be bonded). In the UK binge drinking is a major problem and I think there is now 300% added to the cost price of a beer for taxes. People just continue to drink more and more beer despite the additional taxes. Pubs are no longer viable businesses unless they have a very good food offering, so an entire cultural change has taken place in that working class people who would previously pop down to the pub for a drink, now buy their alcohol from supermarkets and get hammered at home. The whole neighbourhood and togetherness (social fabric) concept in the UK is becoming a thing of the past as people isolate.
    JMHO
    Bootleg liquor was freely available at inflated prices as were cigarettes during the lockdown. The Minister who ordered the lockdown was simply stupid in her thinking and actions. One also cannot but wonder about her relationship with illegal tobacco importers, despite nothing being proved. As for the rest of the sorry mess I will start taking an interest again when I see some prominent looters in orange overalls. Thank God I (like most big companies and many others) got my capital out of SA ages ago.

  10. Good article, Mr. Vegter. I’ve been screaming against “sin taxes” for over a decade now because they only hurt people. At the end of the day, I tell people “I started smoking because of stress, not because it was cool or friends coerced me. Yes, I also drink. It’s not great, but it’s certainly better than getting hooked on prescription pills, fattening shrinks, turning to cocaine, heroin or some other stuff that’s eventually gonna burn down my life if it won’t kill me the first time I use it.” The wannabe dictators in our government (Aaron Motsoaledi and Nkosazana Dlamini-Zuma) only ever managed to harass law abiding citizens and push many into the clutches of the black market. After ten years as minister of health, Motsoaledi was never brought to account for the disaster of the state health system which has nearly collapsed since March 2020 due to Covid, but is instead lauded for how he harassed smokers with the Tobacco and Related Products Amendment Act and proposed to hijack the private healthcare system with his badly crafted NHI Bill, through whose gaps I strolled a huge herd of elephants in a letter to the editor of The Herald newspaper as soon as I read it. Increasing taxes will not make me stop smoking and drinking.Raising those taxes is pointless unless they want the black market to get even bigger and booze trucks become armoured…

    • God help us if the NHI ever gets the final go ahead ,these fools cant even run an existing health system ,how the hell will they run an NHI. NHI is bloody scary in their incompetent hands.

          • My understanding is that at least in Port Elizabeth (now renamed Gqeberha) there are a lot of vacancies in the state health system which have gone unfilled for years and very little, if anything, was done to fill them after Covid-19 struck. Word from quite a few health professionals (mostly nurses) is that they apply for posts and either don’t get a reply or are turned down even though they are qualified and experienced. It’s a serious problem which quite possibly went past “tragic” a long time ago and the needle is now pushing towards whatever lies after FUBAR.

  11. Long article, but I don’t see even a single occurrence of the word “Pigovian”, as in Pigovian taxes, that are meant to bring the external costs of consumption home to roost with the consumer.

  12. “The other argument is simply that levying sin taxes is easy money” That is exactly what its about. Easy pretext for continued theft. All that happens is you eventually kill the golden goose and it transforms into an underground black market. The state then looses completely. So it then creates a new theft tax like “Carbon Tax”. It too will die as the monoplies too will die after there no longer is an economy.
    Margret Thatcher made it so clear. “The Problem with socialism is that you eventually run out of other people’s money”.

    • Socialism is the reaction to Capitalism at the point where it enables income to be derived from stagnant, non-productive assets, i.e. banking and finance, which fuels inequality and messes up the planet.

      • Capitalism doesn’t have stagnant, non-productive assets. Banking and finance are not capitalist. See how quickly the Too Big to Fail banks were bailed out with TARP funds after the 2008 financial crisis, and how the bildungsphilister who came up with the Black Scholes Model were rewarded with a Nobel prize in economics. They got baiiled out too. Without creative destruction, you aren’t dealing with capitalism.

        Inequality is a red herring. If I have enough, I am fine. It doesn’t matter how much my neighbour has. It doesn’t matter if she drives a Porsche and I drive a volla. As long as I earned that volla, and she earned that Porsche.

        But I fear you are right, it is easy for Intellectuals in the Thomas Sowell sense to come out of an insittution like a college or university and see socialism as a viable alternative or an answer to capitalism. It misinforms people to misidentify our system as capitalism, and it shelters the Stepford Students from the realities of socialism. By providing a completely inaccurate diagnoses, and without the lived experience or hindsight of what exactly socialism is about, it is easy to see that as a solution.

        Oh and it’s also not true that banking and finance mess up the planet. The environmental impact of a socialist nation or a subsistence farming community is far worse than an industrialised one. Inequality doesn’t mess up the planet. If you are part of the 1% (misnomer of a term, but it’s frequently employed so..) living in a smart house in Sweden, you don’t have enough waste to keep your recycling going. That doesn’t mess up the planet. On the other side of the scale, if you are living in a township cooking pap on a fire, that has very little environmental impact too. What messes up the planet? Well, corporations like Eskom who are not exposed to market mechanisms, gets bailed out by government and has moral hazard, and don’t have the incentives or skills to move away from coal.

  13. Money that is taken from you without giving a product or service of commensurate value in return is nothing else than pure unadulterated theft.

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