A “Sin Tax” on Junk Food?

A tax on junk food – this is not as crazy as it sounds. In the first place, the government should tax activities that it wants to discourage, in the form of a “sin tax”. And junk food is not a “basic necessity”; people could live well even if they don’t eat any junk food at all. A tax on junk food should help to discourage people from eating junk food. In the beginning, it will not hinder people at all, since the tax won’t be that high; but it will be a good start anyway towards getting people to eat better.

How should we go about having such a tax? Well, I think the tax should be done quite simply. Tax the manufacturers and importers of junk food. Don’t tax the retail outlets, or the kinds of “junk food” that are too small scale.  And most importantly, it should be “budget neutral” (i.e. have a zero net effect on the tax burden of the average citizen).

Let’s say that the government imposes a 20% tax on junk food, to be collected from the manufacturers. This will translate to 5% or less increase in the consumer price. No real suffering there. And let us then say that in order to balance the effect on people’s budgets, the VAT will be reduced by 0.5% – this should balance, since people would consume at least 10 times more in terms of “non junk food” than in junk food (i.e. transportation, meals, phone and electricity bills, etc.) Of course, the government should compute the balance well, to make sure that the net effect will indeed be zero.

What should be considered “junk food”? Well, products such as softdrinks, chips and other finger foods in plastic or aluminum wrappers, chocolates, cookies (for sale in groceries), ice cream, candies, among other things. It should not include fast food (even though some will consider these as “junk”) products, since this is retail, and also difficult to implement.  Products with a certain level of sugar in them should also be taxed; but this should exclude jams and jellies.  For implementation purposes, there would be some “strange” cases; e.g. street foods, no matter how unhealthy, would not be taxed; or cookies and cakes sold by bakeries will not be taxed, while it would be taxed if sold in groceries.  There is a need to keep the tax simple, so only manufacturers and importers will be taxed.

This tax on junk food should increase the level of government income, without decreasing the overall buying power of people. It will be relatively easy to collect the tax; thus, tax compliance is easy to achieve. And, the best part of all, is that people will be discouraged (even to a small degree) from eating junk food.

Privatizing PAGCOR

I think that President Aquino’s plan to privatize PAGCOR is a good idea. In the first place, it will remove the government’s hand from directly “promoting” gambling. And if it does it the right way, government will continue to earn revenue from PAGCOR.

Separation of Functions
By privatizing PAGCOR, the government would have the opportunity to separate its task of regulating the gambling industry, from its task of operating a gambling business. This should mean that gambling will be more regulated than it is at present, with the combined functions of PAGCOR.

The government should first set up a special Gambling Authority, which would take on the task of regulating all forms of legal gambling – cockfighting, lotto, sweepstakes, Small Town Lottery and casinos. This new body would determine where casinos would be allowed, etc. This way, the new body should be able to concentrate on regulation of all gambling; and not be “distracted” with the task of maximizing revenue. This latter task should then go to the management of PAGCOR.

Government Revenue
The government should then  impose a special tax on casino operations, so as to “discourage” gambling, and at the same time raise money from these – as a sort of special “sin tax”. This tax will be in addition to the usual business tax. This way, the government will be able to earn money from gambling, but not be involved in managing the gambling system itself.

The object of government should not be to maximize incomes from gambling, but rather to make the best out of a bad situation – i.e. that people feel the need to gamble.

Shares in PAGCOR
The government seems to be studying the possibility of selling PAGCOR to a single entity, either domestic or foreign. I think this will end up with a privately-owned  casino monopoly, which will not be desirable. The solution that I propose is to sell 50% of  PAGCOR shares on the open market, as an IPO (Initial Public Offering), preferably to Filipinos. The government will retain 25% as a “Golden Share” , to help ensure that PAGCOR will be operated correctly (according to the government, that is). And the final 25% will be sold to a management group, which could be auctioned off to either domestic or foreign parties.

Or the government could do it there other way around, by first auctioning off the 25% to a management group, and then later selling 50% to the general public.

This way, the management will control only 25% of the company. Enough for it to have a decisive say in the day-to-day operations, but not enough to control the direction or objectives of the company. They will not be able to sell it to another party or diversify, since the government controls one fourth of the shares, and will not agree to such changes.

Philippine Taxes on Alcohol and the WTO complaint

The US has joined the European Union in filing a case against the Philippines with the World Trade Organization (WTO) on the issue of taxes on imported distilled drinks.  They charge that the tax on foreign-made whisky and other distillates could be from 10 to even 40 times that for locally made distillates. And that this is against WTO rules.

The Philippines has held on to its position of having lower taxes on locally made distillates on the basis of protecting indigenous communities that produce these products.  Also, the actual law on this specifies the lower taxes to alcohol products made from “nipa, coconut, cassava, carrots, buri, palm or sugarcane”. In theory, if Cuba wants to sell its rum made from Cuban sugarcane in the Philippines, this rum will be subject to the lower tax.

The US and EU want equal treatment, and charge that the law actually discriminates against foreign-made distillates, and not simply on raw materials. They want the excise taxes on their exports lowered to local levels.

This sounds fair enough, but it is not. The  price of the locally made products is much lower than that of the imported product. Thus, if they are subject to the same excise tax, the local product’s price will be affected much more.

I think that the solution to this problem will be to change the “sin tax” on alcohol products from being an excise tax – which is a specific amount taxed per unit of product – to an ad valorem tax, which is simply a percentage tax based on the wholesale price. This will not only solve the current WTO issue, but it will also solve the problem of adjusting the tax to inflation – since the tax rises with the wholesale price, it will always be adjusted to inflation.