Sinful taxing

Smokers constitute the most miserable group of taxpayers in Pakistan. An increase in the tax rate on any group of individuals normally leads to a public outcry. But the government receives little criticism when it jacks up taxes on cigarettes every year.

It is a sin tax, the government says, which discourages a bad lifestyle while generating additional tax revenues.

Just one tobacco company in Pakistan paid Rs86.5 billion in taxes last year — more than the total income tax paid by 1.37 million salaried individuals in 2014-15.

Sin taxes are wrong for two reasons. First, they undermine personal choice. The government should not tell people what kind of lifestyle they should have.

Moreover, there is no guarantee a future government will not add more ‘sins’ to the litany of sin taxes. What if cinemas, concerts and even junk food are someday deemed fit for the imposition of a sin tax?

Second, statistics show that the argument that higher taxes discourage smoking is lopsided. A recent study by Nielsen shows the smoking incidence remained virtually unchanged between 2008 and 2013 in Pakistan, despite a rapid increase in taxes on cigarettes. The volume of cigarettes consumed has simply shifted from the tax-paid segment to the illicit segment, the report says.

This leads us to the commonly held belief that smoking increases government revenues. It doesn’t. Rising tax rates have only paved the way for tax evasion and increased illicit trade of cigarettes in Pakistan. Nearly 24 per cent of gross trade of cigarettes in Pakistan is illicit. As a result, the national kitty is losing Rs24 billion a year.

Excessive taxes on a product that is legal to consume, create two problems. One, the government becomes increasingly dependent on an activity for revenues that it otherwise claims to discourage. Two, unrealistically high taxes give law-abiding people a motivation to violate the law. The government should strive for economic growth to increase its tax collection.

Published in The Express Tribune, May 8^th, 2016.