Box 11.1Using Taxes to Influence Consumption and Production Behavior

Taxes as a tool for health policy face significant implementation obstacles. First, targeting can be difficult. A close link must exist between the consumption of the product or behavior to be taxed and a specific population with a health risk. For instance, all consumers would pay a tax on "junk" food, even though it would only present a health threat to a small percentage of them. The taxed good must also be appropriately defined in relation to close substitutes; for example, taxing only certain forms of tobacco such as cigarettes, but not chewing tobacco, may increase consumption of the latter. Governments may also distinguish between locally produced goods and imported goods, often because of lobby groups. If governments place a higher tax on the good that is less harmful, this action will encourage greater consumption of the more harmful good.

Key weaknesses in using taxes for health policy include the feasibility of smuggling and the existence of large informal or illegal markets. Smuggled or contraband products that cannot be regulated or certified for quality and safety, such as alcohol or tobacco in particular, may be more harmful to health than goods that are legally produced and sold.

Any tax should be efficient in terms of both its administration and its effect on resource allocation. Tax authorities need a well-functioning system for imposing, collecting, and monitoring taxes and taxed products, and the public should perceive the system as fair and credible in order to achieve a high degree of compliance.

Finally, a tax should be cost-effective in achieving its stated goal of improving health outcomes. The net costs of imposing the tax should compare favorably with the net costs of using another policy instrument, such as regulation or direct government provision. Depending on the characteristics of the tax base, the health goal and the revenue goal may even be at odds.

Source: Authors.

From: Chapter 11, Fiscal Policies for Health Promotion and Disease Prevention

Cover of Disease Control Priorities in Developing Countries
Disease Control Priorities in Developing Countries. 2nd edition.
Jamison DT, Breman JG, Measham AR, et al., editors.
Copyright © 2006, The International Bank for Reconstruction and Development/The World Bank Group.

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