Overarching principles for tax policy makers in reforming taxation systems

Tax instruments (and the overall tax system itself) are assessed largely by reference to the criteria of simplicity, equity and efficiency⁽²¹⁾. ‘Simplicity’ relates to the ability of the revenue authority to administer a tax and the taxpayer to comply with the tax. In theory, the simpler the tax, the greater the certainty involved in its imposition, and, therefore, the greater the ease with which the tax can be administered and complied with.

‘Equity’ as an element of social justice and human rights has many definitions, but two varieties are of special relevance here: horizontal equity (an ethical principle that argues that persons here and now, occupying the same economic and social space, should be treated the same) and vertical equity (an argument that persons in a different social and economic context should be treated differently and, in particular, those with a greater capacity to pay should pay more tax to assist those who need affirmative support). A regressive tax is one that breaches vertical equity in that those with lower incomes pay proportionately more of their income as tax than those with higher incomes.

‘Efficiency’ requires that a tax should be neutral in the way that it affects economic behaviour (both in relation to consumer choices and productive processes). There is a loss of efficiency if a tax encourages an individual to substitute goods and services that they value less for goods and services that they value more. The costs of administering and complying with a tax involve a loss of efficiency.

These overarching principles guide tax policy makers in both tax system reform and selecting appropriate instruments for taxation, and there are important relationships between these goals. For example, simplicity in the design of a tax can lead to lower administration and compliance costs and, therefore, greater efficiency.

The global tax reform agenda: an overview

The global tax reform agenda has changed the global economy fundamentally over the past 30 years. Barriers to cross-border flows of production (such as the removal of exchange controls to facilitate flows of capital) have been demolished and goods and services have moved more easily among nations. Multinational enterprises have emerged as truly global organisations responsive to tax differentials, and this in turn has created incentives for all countries to improve their tax systems to attract and retain foreign investment. The World Trade Organization (WTO), IMF, World Bank and the Organization for Economic Cooperation and Development (OECD) have grown in power and authority. Many judge the new tax systems as more efficient than the old.

The global agenda for reform has not only informed development of tax systems to date but also continues to shape policy decisions, as tax systems are continually adjusted⁽Reference Stewart^18, Reference Bahl and Bird^22–Reference Garber²⁴⁾ (Fig. 2). This section provides a brief overview of the emergence of the global tax reform agenda and its main priorities.

Fig. 2 Major influences on national tax policy makers

For low-income countries, the close of the colonial era and rise of international aid for development led to pressure for the reform of inefficient, inequitable tax systems plagued by administrative problems⁽Reference Bahl and Bird²²⁾. In the 1980s, tax reform became part of IMF conditionalities, and the World Bank initiated research comparing the process and success of tax reform initiatives in various countries^(25, Reference Abed²⁶⁾. These agencies have played a major role in advising low-income countries to reform their tax systems to ensure that they are commensurate with administrative capacity.

At the same time, there was a growing adoption of consumption taxes – namely VAT – among OECD countries⁽²⁷⁾. The USA is the only OECD country to still use sales tax rather than VAT⁽²⁷⁾. Consumption taxes were adopted by the IMF and later by the World Bank as a key recommendation within their structural reform packages for low-income countries^{(25, 28)}. Consumption taxes are preferred because they have a lower administrative burden and – particularly when a flat rate tax is applied to a broad base – they are an efficient way to raise revenue⁽Reference Cnossen^29, Reference Gemmell and Morrissey³⁰⁾.

By the early 1990s, there was a remarkable global consensus, especially among international institutions, regarding tax reform, with the result that despite tax system differences between countries, the priorities and policy aims of tax policy makers have become similar⁽Reference Stewart¹⁸⁾. Consumption taxes such as VAT or goods and services tax (GST) are now one of the main sources of revenue in most countries, replacing the existing, often ad hoc and highly complicated, taxation structures⁽Reference Cnossen^29, Reference Thirsk³¹⁾. There have also been reductions in the use of trade-related taxes, as required by policies of trade liberalisation⁽³²⁾; import tariffs have declined in both developed and developing countries⁽Reference Bahl and Bird²²⁾. ‘Tariff bands’ have come into favour, which are set rates for tariffs (e.g. 5 %, 10 % and 20 %) that are often linked to planned rate reductions (e.g. after 5 years, the 20 % band becomes 15 %, 10 % becomes 8 %, etc.)⁽³²⁾. The work of the WTO, which was created in 1994, has served to reinforce this aspect of the tax reform agenda. In many low-income countries, the recent adoption of a VAT or GST has been closely associated with a reduction in trade tax revenue⁽Reference Burns³³⁾. While the VAT is imposed on both imports and domestic production, in many low-income countries it is largely collected at the border and therefore replaces lost trade tax revenue.

Excise taxes have been used less in many countries as the tax structure has been simplified and broad-based consumption taxes introduced. However, they remain an important component of tax systems as a tool for revenue raising and correcting for externalities⁽Reference Bolnick and Haughton^34–Reference Cnossen³⁶⁾.

Thus, in summary, the global priorities for tax reform are to simplify administration, minimise distortions and maximise revenue. In relation to consumption taxes, the main agenda includes implementation of broad-based, flat rate general consumption taxes, the use of specific (usually excise) taxes only to correct for negative externalities, and reductions in import taxes in line with trade liberalisation (Table 1).

Table 1 Implications of the global tax reform agenda for public health nutrition taxation

VAT, value-added tax; GST, goods and services tax; WTO, World Trade Organization.

The global tax reform agenda: implications for nutrition-related consumption taxes

There is scope within the global tax reform agenda for changes to tax systems that help to achieve health and nutrition objectives. This is partly because tax systems are constantly changing due to ongoing reform⁽Reference Freebairn^23, Reference Gemmell and Morrissey³⁰⁾, and also because there is recognition by taxation specialists that the tax system plays a role in supporting other policy objectives⁽Reference Cnossen^36, Reference James and Edwards³⁷⁾.

The general tax policy priorities described in the previous section suggest broad strategies that will make proposals for public health nutrition taxation interventions more feasible for tax policy makers to implement (Table 1). Public health nutritionists can contribute to simplifying tax administration by making proposals that are simple to implement and make use of existing tax policy mechanisms and tax rates. This minimises administrative costs because legislative and administrative processes for tax implementation and collection already exist, and established procedures and staff are in place for both the revenue authority and the taxpayer. In terms of maximising revenue, public health nutritionists can support the streamlining of taxes by not proposing new types of taxes or differential tax rates (e.g. special tax rates on certain foods). Again, a better option would be to examine the existing rates and types of taxes and utilise these for proposals. In doing so, it is important to reduce or limit distortions in the tax system. Further, proposals should explicitly describe the probable burden of the tax (including regressivity), as well as its benefits (i.e. reductions to the fiscal burden in the future through chronic disease prevention and additional revenue).

More specific policy directions for consumption taxes, tariffs and excise taxes are evident globally, and these also have implications for public health nutrition taxation (Table 1). The trend of general consumption taxes (sales tax and VAT) towards flat rate VAT has meant the replacement of a large number of different taxes on consumption, and limits the scope for applying widely varying rates of tax to different goods. However, it is not uncommon for VAT to have exemptions for essential foods⁽²⁷⁾, which could be extended to reduce the tax on healthy foods, or could be removed from unhealthy foods to increase taxes on these foods. The difficulty with this, though, is that it creates borders based on definitions of ‘unhealthy’ that have to be policed by the revenue authority and, from a taxpayer perspective, creates opportunities for tax evasion.

The use of specific consumption taxes (e.g. excise taxes) is decreasing as taxes are streamlined, but excise taxes remain important for correcting externalities^(28, Reference Cnossen³⁶⁾. Proposals for excise taxes should explain the contribution of diet to poor health outcomes and clarify the role of the tax in influencing the consumption of specific foods or groups of foods, as well as raising revenue to compensate for the cost of diet-related chronic diseases⁽Reference Finkelstein, French and Variyam^11, Reference Nugent and Knaul^19, Reference Brownell and Frieden³⁸⁾.

As a priority of both trade liberalisation and global tax reform, the reduction of trade taxes and introduction of bound rates and tariff bands mean that there is less scope to change tariff rates in response to public health nutrition priorities. Aligning proposed tariff changes with existing tariff bands and ensuring that they remain within bound rates makes administration and implementation easier, and is more likely to be acceptable. Alternatively, as a strategy for reducing the cost of healthy foods, the reduction or removal of tariffs supports trade liberalisation, and could be a more feasible way to reduce taxes than changes to VAT. Another result of trade liberalisation is that many governments in low-income countries are actively seeking new sources of revenue as income from tariffs declines. As such, there may be increasing scope for the proposal of new taxes (e.g. excise taxes) that benefit both finance and health⁽Reference Burns³³⁾.

Each country also has its own priorities for tax reform. In order to develop feasible proposals, public health nutritionists need to bear in mind the current national tax structure for food and national policy directions, as well as global policy priorities. For example, while global policy directions suggest against proposing changes to the VAT, if a country has a differentiated VAT then there may be a case for applying the highest VAT rate to unhealthy foods – using the existing tax bands but still increasing the tax. Ongoing, informed consultation with national tax policy makers is essential for the development of feasible proposals.

Critical assessment of recommendations for nutrition taxation

Public health nutritionists have recommended a variety of taxes to provide incentives for healthy diets and reduce the burden of chronic disease. This section presents a review of these recommendations and critically assesses the different types of proposals against the priorities of the global tax reform agenda (Table 2). Full details of the findings of the present study are provided in the Appendix.

Table 2 Critical analysis of recommendations for use of public health nutrition taxation

VAT, value-added tax; GST, goods and services tax; WTO, World Trade Organization.

One of the most common specific recommendations was for excise taxes, particularly on soft drinks as an easily identifiable commodity that adds little or no nutritional value to the diet while being associated with a higher disease risk⁽Reference Brownell and Frieden^38–Reference Bahl, Bird and Walker⁴⁰⁾. Excise taxes are one of the most appropriate tools for public health nutrition because their use in correcting for externalities (the basis of public health nutrition taxation) is supported in the taxation literature. However, their feasibility will depend on whether a mechanism is in place for effective excise tax collection. Linking such taxes explicitly to health goals has also been found to improve public support⁽Reference Leicester and Windmeijer¹⁶⁾.

Several proposals for public health nutrition taxation have suggested changes to general consumption taxes, including increased VAT on soft drinks⁽Reference Gustavsen⁴¹⁾, reduced VAT on healthy grain products⁽Reference Nordström and Thunström⁴²⁾ and increased sales tax on soft drinks and snack foods⁽Reference Chriqui, Eidson and Bates^13, Reference Tefft⁴³⁾. However, the main point of introducing a VAT – and the reason for the trend towards flat rate VAT – is that through its broad base and single rate it is an efficient tax that is reasonably simple to administer. As a result, changes to VAT that lead to distortions and add administrative complexity are unlikely to be implemented.

As discussed above, the feasibility of tariff changes largely depends on whether they are consistent with the trade liberalisation agenda. Proposals for tariff increases that have been made in the Pacific (Welegtabit⁽Reference Welegtabit⁴⁴⁾) are technically contrary to policies designed to reduce barriers to trade, such as the Pacific Island Countries Trade Agreement. However, if these increases are within bound rates and are non-discriminatory (see glossary), then they are feasible proposals to support public health nutrition priorities⁽Reference Thow⁴⁵⁾. In contrast, proposals to decrease tariffs on healthy foods⁽⁴⁶⁾ align with trade liberalisation priorities, and so are more feasible.

More complex proposals have included tax and subsidy packages that are revenue neutral⁽Reference Nordström and Thunström^42, Reference Jensen and Smed⁴⁷⁾, and variable taxes based on the price change are required to reduce intake of unhealthy food to nutritional recommendations⁽Reference Santarossa and Mainland⁴⁸⁾. These types of proposals are unlikely to be implemented, simply because of the associated administrative complexity. However, the feasibility of these proposals could be improved by using existing types of taxes and tax rates.

Several recommendations did not describe the specific tax used or proposed⁽Reference Magnusson^3, Reference Boizot-Szantaï and Etilé^49–Reference Nestle and Jacobson⁵⁷⁾. While this strategy allows tax policy makers to select the most appropriate tool for taxation, it may reduce the likelihood of the proposal being adopted because it creates additional work for tax policy makers. While improving nutrition is a priority for health policy makers, the different priorities within finance may mean that little time is available to research and develop the details of such a proposal.