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Thu, February 2, 2023 | 09:51
Economy
Is sin tax necessary evil?
Posted : 2017-08-03 18:30
Updated : 2017-08-03 19:19
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By Nam Hyun-woo

The main opposition Liberty Party of Korea's (LKP) controversial proposal to lower taxes on cigarettes to the level of two years ago is igniting debate over so-called sin taxes.

Sin taxes refer to excise taxes levied on consumer goods such as cigarettes, alcohol and gambling. The government seeks to discourage people from consuming them, but does not want to make them illegal because of the state revenue generated.

The LKP submitted a bill aimed at slashing cigarette taxes so that the price of a cigarette pack could go down to between 2,500 won and 2,700 won from 4,500 won on average.

The move drew harsh criticism not only from other political parties but also from the public because the Saenuri Party raised the price to the current level in 2015.

The Saenuri Party was the ruling party during the former Park Geun-hye administration, and changed its name to the LKP following a scandal involving Park and her associates.

The party then pushed the price hike, arguing that it was "for the sake of improving public health" as Korea has the highest smoking rate in the OECD.

But this time, the LKP is calling for a price cut to "reduce the people's burden, especially among the middle and low-income earners."

The LKP said that it admits its misjudgment because the hike failed to meet the initial purpose of promoting public health.

"Since many smokers are not wealthy, it was a de facto tax hike on the middle class," LKP spokesman Rep. Choung Tae-ok said in a recent radio interview.

According to the Ministry of Strategy and Finance, the volume of cigarettes sold in the first half of 2014 stood at 2.03 billion packs, and dropped to 1.46 billion packs in the first half of 2015 after the price hike.

The volume, however, soon rebounded to 1.78 billion packs in the first half of 2016 and 1.72 billion packs in the first half this year.

The rebound has debunked the Korea Institute of Public Finance which predicted that a 2,000 won price hike would bring about a 34 percent decrease in tobacco sales.

The government said then that the institute's report was good enough to enforce a tax hike on cigarettes.

Korea's tax revenue from cigarettes almost doubled from 6.9 trillion won in 2014 to 12.4 trillion won last year amid a question over the effectiveness of the tax hike on public health.

The government expects this year's tobacco tax revenue will surpass at least 10 trillion won, which is almost equal to Samsung Electronics' operating profit in the first quarter this year after the tech giant achieved a 26.1 percent share in the global smartphone market.


Deep-rooted dilemma

Even though the purpose of sin taxes is to discourage undesirable activities like smoking and drinking and increase tax revenue, some experts said that it would be impossible to achieve them both at the same time.

This is why the economics of "a two-for-one benefit" faces a dilemma.

In his book "How Capitalism Will Save Us," Steve Forbes, editor-in-chief of Forbes, wrote that "sin taxes and other attempts at social engineering through taxation usually fail."

He added: "Sin taxes often don't work because states end up dependent on the very activities they're supposed to be taxing out of existence. When the activities decline, so do tax revenues."

One of the cases he introduced was the state of Maryland in the United States.

In the 1990s, Maryland held a relatively low tax on cigarettes, levying 36 cents on a pack.

It was increased to 66 cents in 1999. It then raised it to $1 in 2002 and $2 in 2008.

These hikes were aimed at curtailing the number of smokers in Maryland as well as coping with the state's budget shortfall.

According to Joseph Henchman, executive vice president at the Tax Foundation, then-Governor Martin O'Malley estimated that the 2008 increase would result in a 95 percent revenue increase a year.

However, it only ended up bringing in 51 percent increase in 2008, because cigarette sales have dropped sharper than the state expected.

Not only Forbes, but also other experts agreed that sin taxes will bring a reduction in the supply of the taxed commodity, as well as bringing "unintended consequences," such as smuggling.

According to Rev. Robert Sirico, co-founder of Acton Institute, in the same way bootleggers used to smuggle liquor into the U.S. in early the 20th century, sin taxes will lead smokers to have "greater temptation" to engage in black market activities.

Korea's cigarette price hike also showed that it was not able to achieve its intended outcome with its tax hikes on cigarettes. It failed to lower the country's smoking rate, but it generated more tax revenue for the government.

In June, news reported that the Saudi Arabian government started to levy or raise taxes on cigarettes, energy and soft drinks.

The government said the hike was aimed at promoting public health.

But observers say it was to make up for the government's fiscal shortfall amid the prolonged decrease in prices of oil, its main source of revenue.

"The problem is that cigarette smoking has declined as a consequence not of more taxes on smoking but a greater public awareness of its health effects," Forbes wrote in his book.


Cost-sharing

Prof. Oh Moon-sung of Hanyang Women's University, said sin taxes are necessary to finance growing social costs including public health insurance amid an aging society.

Oh added national health insurance schemes are designed to benefit those suffering illnesses much more than those who are not.

For the sake of sharing social costs, he said, Korea must maintain the current cigarette tax level.

"We should consider the initial purpose of sin taxes -- discouraging undesirable activities," Oh said. "Those activities are believed to pose a negative impact on one's health, thus exhausting resources in Korea's national health insurance."

In the long run, the application of sin taxes should be expanded because there is a clear necessity to give a social signal over health promotion, he said.

"Also, other countries are trying to levy various types of sin taxes, such as sugary drink tax and video game tax."
Another point that Oh mentioned was downward rigidity in fiscal expenditure.

In the same way people usually don't expect next year's wage to decline, a government's fiscal spending is unlikely to go down.
"The government's welfare spending has never been this big in history," Oh said.

"Welfare expenditure is likely to grow further, making the government reluctant to lower cigarette taxes, which have been a substantial revenue source over the past two years."


Emailnamhw@ktimes.com Article ListMore articles by this reporter
 
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