Sugar taxes and their ilk would break NZ's elegant tax system

If a tax on sugar is the next most efficient tax, then it shouldn't matter what the money is spent on, Eric Crampton says.
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If a tax on sugar is the next most efficient tax, then it shouldn't matter what the money is spent on, Eric Crampton says.

OPINION: Taxing sugar to pay for health programmes doesn't make any sense, says Eric Crampton.

 It is very, very easy to break a beautiful tax system. Here is the recipe for doing it.

Start by finding some product that seems a little frivolous – a bit of a luxury – and preferably one that's mostly used by people that the typical voter does not really like anyway. Say, for example, the fancy beard oil used by hipsters to maintain their elegant facial appendages.

Then, find some cause that nobody could object to. Something really motherhood and feijoa pie. Tieke recovery. Who doesn't love the New Zealand saddleback and support its recovery? Nobody.

Add the two together and propose a tax on hipster beard oil to help fund Tieke recovery programmes. Who could object? Hipsters are at best a mild nuisance, and at worst a looming threat to national identity; beard oil seems the height of frivolous consumption; and Tieke are a perennial entry in Bird of the Year competitions.

The bundle is an economic abomination. If Tieke recovery is the best use of the next public dollar, it is best regardless of whether we tax hipsters' beard oil. And if a tax on hipsters' beard oil is the most efficient next tax to impose, then the government should tax it regardless of whether the money raised is used to cut other taxes, fund Tieke recovery, or fund something else entirely.

But none of that much matters. Treasury would scream, because economists know that these kinds of taxes are abominations. But Labour dismissed Treasury critiques as ideological burps, and National's Gerry Brownlee has been no less dismissive of sound Treasury analysis. Politics rules in the end.

Taxing beard oil may sound frivolous, but consider campaigns to tax soda, or sugar, to fund public health campaigns. If a soda tax makes sense, then it makes sense regardless of whether the public health campaigns are the best use of funds. And if the public health campaigns are that valuable, why is the government not already cutting other less beneficial programmes to fund it?

The answer of course is that public health campaigns worth running are already largely being tried, and that a soda tax makes little economic sense – as Jenesa Jeram shows in her report, The Health of the State, released recently by The New Zealand Initiative. Putting the tax and the health campaigns together hardly improves the economics of the tax-and-spend bundle, but does make the package more politically appealing.

But there are a near infinite number of tax-and-spend bundles you could imagine that all sound very politically appealing. Tax fancy coffee drinks (frappucinos, not flat whites) to fund cataract surgery for grandmothers. Tax charging cables for the latest model of iPhone to fund breakfast in schools programmes. Tax USB-powered desk toys to help find homes for cute kittens so they are not put down by the animal shelter. Kittens!

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Who could object to any of these but a cold-hearted economist – or anyone who spends a minute to think through the administrative burden imposed by a ridiculous morass of taxes each designated for a different bucket regardless of whether need is greater in other areas.

Here's hoping that laying out the recipe for breaking a tax system does more to help you, the reader, notice and avoid such pernicious menu items than it does to whet politicians' appetite for them.

Eric Crampton is head of research at the New Zealand Initiative.

 - The Dominion Post

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