Taxing the 'bad' not so straightforward

19:14, Feb 24 2014
Taxing Times
Taxing Times is a weekly column that looks at various aspects of tax and money management.

Yet again we have calls for another tax: this time a tax on soft drinks.

In October last year, I discussed recommendations from the Commission for Financial Literacy and Retirement Income to remove tax on the inflation component of interest on simple savings products such as bank deposits and bonds. My view was that removing tax on the inflation component of interest is not as straight forward as it sounds and unlikely in my view to eliminate the bias against fully taxed savings products.

Readers will recall similar requests to use the tax system to encourage "goods" and discourage "bads". Removing GST on fresh fruit and vegetables, and Gareth Morgan's suggestion for an increase in tax on unhealthy food are two such examples.

The latest proposal continues the theme of taxing unhealthy food. An article recently published in the New Zealand Medical Journal suggests levying a 20 per cent tax on sugary soft drinks as a means of fighting obesity and related diseases.

The report's authors believe this could prevent 67 deaths per annum and generate $40 million in tax revenue to assist with education.

I couldn't agree more with the view that we consume too many sugar-rich products and that we need to change eating habits. However, I do not agree that introducing yet another tax will yield the results the authors of the article claim.


There is no doubting that taxes do influence behaviour. For example, tax on cigarettes not only benefits the Government's revenue, but anecdotally the ongoing tobacco tax increases is starting to impact their consumption.

However, reducing taxes on something to either encourage or discourage consumption is often fraught with hidden difficulties that are not readily apparent. A key point often overlooked is where the incidence of the tax saving or increase falls and who ends up paying it. For example, the proposal to remove GST off fresh fruit and vegetables was flawed as the intended saving for consumers ends up as a cost to growers, and if the costs of growing fresh fruit and vegetables increases who pays? Taxing soft drinks could well end up a cost to consumers for those who want the product regardless. Many of these people are lower income earners. Many people will either take this cost from other things, or substitute away to those things not taxed. This may well be happening with cigarettes. Also, producers of soft drinks could well alter their product mix and carry on as before.

Further, where do you draw the line?

The report's authors target soft drinks, but where is the policy rationale for limiting such a tax to that product? If the tax is designed to discourage consumption of drinks with certain sugar levels, what about things such as fruit smoothies and flavoured milk. Fruit contains fructose and milk contains lactose: both sugars: why target just the processed sugar in soft drink? What about iceblocks and icecream, they are just frozen soft drink equivalents?

I sympathise with the report author's, indeed I support reducing sugar intake, but the solution is not to be found in the tax system.

Craig Macalister is tax principal at accounting firm Crowe Horwath. He can be contacted on (03) 211 3355.

The Southland Times