One of the recurring concerns of the medical profession is the rapidly increasing waistlines of the nation – particularly children. A frequently advocated solution is a “fat tax”. Proponents of the tax argue that if you increase the price via taxes, people will turn to less unhealthy foods.
The issue was explored on BBC Panorama earlier this week (you can watch it here if you missed it). Among other things, the programme pointed out that the level of exercise needed to get rid of the amounts of fat people consume is such that getting people to abandon sedentary lifestyles is just not going to happen (e.g. power walking burns 600 calories and hour but some of that is the normal 100 or so calories an hour everyone burns just being alive).
There is no doubt that tax can influence behaviour. One of the best examples of this is landfill tax. Progressive increases in the level of tax have lead to substantial decreases in what actually goes to landfill. On the other hand, other taxes appear less successful in deterring individuals from what might be regarded as “bad behaviour”, e.g. tobacco taxes have probably had less impact on getting people to stop smoking than non-tax measures.
The CIOT has no view on whether a fat tax would or would not work but a number of questions arise:
Is a fat tax compatible with EU and other international law?
One suggestion that is frequently advanced is the levy of a higher rate of VAT on fatty foods. There is a problem with this however – the maximum rate of VAT that can be imposed under EU rules is the standard rate – 17.5% now and 20% from 4 January 2011. What is more most of the foods that people would like to tax are already taxed e.g. hot takeaway foods, crisps, fizzy drinks, sweets and other confectionery are all standard rated rather than zero-rated. Any other turnover based tax would also be prohibited.
What is possible is an excise tax. EU law allows Member States to levy excise on any good as long as they do not give rise to border crossing formalities. EU law governs the excise structure and process on alcohol, tobacco products and energy products. Therefore, a tax on say sweets would be a national tax and not be bound by EU law.
How do excise duties work?
Excise taxes are levied on the production or importation of goods. The best examples are duties on alcohol, tobacco products and hydrocarbon oils. These are typically levied on volumes or other physical criteria e.g. the alcohol content of drinks. Theoretically, it should be possible to specify the foods that are subject to the tax and identify the criteria, e.g. fat, salt or sugar content or a combination of them. However, questions arise as to how to measure the tax base, e.g. a small trader buys in mince and other ingredients which he uses to make hamburger patties – should he have to pay the fat tax or should the ingredient be taxed further up the food chain? There would be substantial tax compliance costs for businesses affected.
The key to excise duties is the definition of the taxable commodity. Complexities around how damaging the good is will need to be analysed. If the intention was to switch consumer behaviour to healthier alternatives, applying a blanket tax on all goods with a fat, sugar or salt content above a certain amount may be an option (pre- or post cooked).
Denmark has an excise duty on confectionery and carbonated soft drinks and Holland has an excise duty on carbonated soft drinks so there are EU precedents.
What do you do with the revenues?
A fat tax could be an ideal way to raise further income to reduce the deficit. However, for taxes to influence behaviour, one wants the tax base to reduce! A successful fat tax would mean a reduction in consumption of fatty foods so revenue would fall.
Some argue that any tax revenue raised should be hypothecated to encouraging good behaviour, e.g. allocated to the NHS to fund treatment of eating disorders. There is no legal requirement to hypothecate revenue from a fat tax. People have to eat something, so rather than reduce consumption altogether, the aim would be to divert consumption to healthier alternatives. An interesting point would be whether full fat milk and cream are caught by the tax whilst fat free alternatives are not.
Are there any other issues with a fat tax?
Yes. One of the most obvious is the regressive nature of the tax. Fast foods such as burgers, pizzas, crisps and sweets are likely to be consumed disproportionally by poorer families. That means that a fat tax is likely to be highly regressive in nature. For example, taxing fatty foods could increase the cost of the evening meal of a family on the housing waiting list who are housed in bed and breakfast accommodation. Specific excise taxes are regressive in nature. For example, for wine, the duty is £2 per litre whether the wine costs £300 per bottle or £4.
What about non-tax issues?
Tax on its own may not be sufficient. Take landfill tax. Although the progressive increase in tax had an impact it was matched by other action, e.g. further environmental legislation. In relation to food, tax on its own may not be enough. Fast foods can be very cheap – they are also convenient by saving in preparation time as well as the time spent clearing up afterwards. For those who work long hours (despite the working time regulations), buying time is important.
Among the countries that have mooted fat taxes are Romania, Spain and Denmark. The European Commission apparently recognises that fat taxes are compatible with EU law. Fat taxes will inevitably be tempting to other governments too, given that it is generally easier to sell taxes that have desirable objectives beyond simply raising revenues. Nevertheless, it would be a mistake to simply decide on a fat tax and only then look at how to implement it. Before committing to introduce a fat tax governments need to consider who they are targeting, how the tax will work alongside other measures and what the impact will be on business. They will also need to analyse closely the type of products they will hit and how they will define them. And they should weigh the potential benefits against the added complexity the tax is likely to bring.
Maric Glaser, CIOT Technical Officer (Indirect Taxes), Thursday 18 November 2010