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Taxing tobacco and the new vision for financing development

Patricio V. Marquez's picture

As part of the 2016 World Bank Group-International Monetary Fund Spring Meetings held this past week in Washington, D.C., a fascinating panel discussion, A New Vision for Financing Development, took place on Sunday, April 17. Moderated by Michelle Fleury, BBC's New York business correspondent, it included World Bank Group President Jim Yong KimBill Gates, Justine Greening (UK Secretary of State for International Development), Raghuram Rajan (Governor of the Reserve Bank of India), and Seth Terkper (Minister for Finance and Economic Planning of Ghana).
A construction worker takes a break in Timor-Leste. © Alex Baluyut/World Bank The panel was in consensus about the current challenging economic and social environment facing the world as a whole.  That environment includes low rates of economic growth across the world, drastic reductions in the price of commodities that are impacting negatively low-and middle-income countries, rising inequality, frequent natural disasters and pandemics, increased number of displaced populations and refugees due to conflict and violence spilling across national borders and continents, and the ambitious United Nations 2030 Agenda for Sustainable Development, which includes a set of 17 Sustainable Development Goals (SDGs). A question debated in the panel was, Where will the resources be found to address these challenges? This question is critical under the current scenario if countries are to continue to build on the progress achieved over the last decade and maintain previous gains.

Gates noted that new and innovative tools are required alongside the promotion, adoption, and adaptation of good practices to make a difference in dealing with these challenges. Terkper advocated for maintaining official development assistance commitments and adopting flexible risk-sharing financial instruments by multilateral organizations to help countries attract and leverage private investment. The importance of investing in the development of healthy and productive populations as key engines of economic and social development over the medium and longer terms was stressed by Kim, who argued that many governments have to be convinced to invest in "soft sectors" health, nutrition, and education compared to the "hard sectors"   roads, ports, and energy infrastructure.

While international financial assistance is necessary to help countries translate into reality the vision for a world free of extreme poverty, where there is opportunity for all, it should be recognized, as observed by Rajan, that domestic resources depend in large measure on economic growth. Growth, in turn, is supported by an enabling economic, social, and environment policy environment, including counter-cyclical fiscal policies, adequate fiscal space, and good governance. But, as highlighted by Greening, national governments must recognize that in accordance with the Financing for Development Addis Ababa Action Agenda adopted in July 2015, the active mobilization and effective use of domestic resources, underscored by the principle of national ownership, are central to the common pursuit of sustainable development.  

If development is lifting up lives, and new and innovative approaches for funding development are seen as “game changers,” then I would argue that the development community needs to redouble its commitment to advocate with national governments and society at large for raising taxes on tobacco products. Taxing tobacco is one of the most cost-effective measures to reduce consumption of products that kill prematurely, make people ill with all kinds of tobacco-related diseases (e.g., cancer, heart disease, respiratory illnesses), and cost health systems enormous amounts of money for treating often preventable diseases. In addition, hiking tobacco taxes can help expand a country’s tax base to mobilize needed public revenue to fund vital investments and essential public services that benefit the entire population and help build the human capital base of countries, such as financing the progressive realization of universal health coverage and mental health scale-up as well as education for all and early childhood development initiatives. Indeed, data from different countries indicate that the annual tax revenue from excise taxes on tobacco can be substantial (e.g., close to 1% of GDP or $3 billion in the Philippines in 2015). 

We at the World Bank, in partnership with the Bill & Melinda Gates Foundation and Bloomberg Philanthropies, as well as World Health Organization, are already working and committed to support countries in the design and implementation of tobacco taxation policy measures and monitoring their health and fiscal revenue impact, as a critical element of the global development agenda. The time has arrived to make tobacco taxation an important source of domestic resource mobilization that has the potential to generate substantial health and social welfare dividends across the world.

Comments

Submitted by Derek Yach on

Raising excise tax has always been a core goal of the WHO Framework Convention on Tobacco Control. And there remain many countries, who despite adopting the FCTC, have yet to raise taxes appropriately. This call by Patricio reinforces these calls-which began decades ago. However, the call will result in the same slow and for many countries, ignored response unless more innovation is introduced into the arguments that appeal to the population, to policy makers and-to the tobacco industry.

For the population-explicitly earmarking taxes to address NCD prevention, mental health programs and some high priority underfunded MCH programs will receive much stronger popular support then taxes going into general revenues. In an era of transparency-this is long overdue and the World Bank and IMF need to reverse their opposition to this and look at the experiences of Thailand and past experiences of Australia. Popular support matters more today then ever before.

For policy makers-there is a critical need to expand the use of fiscal policy for health but in ways that aim to reduce health risks more innovatively. Tobacco is a major risk to emphasize-but there are others.

For the tobacco industry-the tax regime needs to be proportionate the harm caused by products. Zero rating many new reduced risk tobacco products and raising current tax levels on traditional cigarettes would have two desired effects-it would help smokers shift to lower harm products and save millions of lives and it would create a powerful market force to drive out traditional cigarettes. That would benefit countries over the long run and if done carefully--maintain needed government revenue so needed.

Submitted by Jodi Butts on

Addiction is also a form of mental health challenge. Taxing tobacco at the consumer level can be a pretty regressive means of funding the scale-up of mental health services, unless tax revenues are deployed to support smoking cessation programming.

Submitted by Vinayak M Prasad on

It's a timely blog that reiterates the commitment from Member states on raising tobacco taxes to finance development. A recent WHO publication estimates the tax potential to exceed USD 330 Billion. Country capacity to raise taxes is sometimes weak especially where there are demands for " carve outs" to address livelihood considerations. Equally important is the subject of tax administration ( often considered a GIVEN). The tax policy and tax administration strengthening must go together . The third dimension is illicit trade. often talked about by tobacco industry ( when tax policy / tax increase is changing) . The reality is that an efficient tax Adminstration system, that is able to secure the supply chain of tobacco products is the best antidote to illicit trade, and not a lower tax regime ( as often argued by the tobacco industry).

Submitted by Lorenzo Rocco on

Yes taxing tobacco is crucial to curd demand and make smokers responsible for the external effects they impose to the society, especially in countries with publicly funded healthcare. However there is an upper bound to tobacco taxation, that level determined by the emerging of black markets. If taxes are too high, people arrange to smuggle tobacco across national borders to evade taxation. Black markets can be extremely dangerous as they fuel criminal activity and might exchange tobacco of very poor quality, particularly bad for health. The level of taxation above which black markets open depends on how easy tobacco can be illegally introduced in a country.

Submitted by Jeremias Paul Jr. on

The experience of the Philippines shows that fundamental restructuring of the tobacco excise tax structure – simplification by reducing the number of tiers, indexation of tax rates to inflation and substantial tax increases to have a public health impact – is good for both fiscal and public health. About eighty percent of the US$ 3.9 billion in additional revenues generated from the Sin Tax Law in its first three years of implementation is accounted for by tobacco. The additional fiscal space increased the Department of Health budget threefold and increased the number of families whose health insurance premiums were paid by the National Government from 5.2 million primary members in 2012 to 15.3 million in 2015. Additional fiscal space was also generated from interest savings as the Philippines got an investment grade rating shortly after the passage of the Sin Tax Law. Indeed, tobacco taxation is a low lying fruit to raise domestic resources to attain the Sustainable Development Goals.

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