Sin Tax in the Philippines

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Sin tax is a tax levied on a certain goods and services that are seen vices, such as alcohol, tobacco and the like. Sin tax is used for taxing activities that are considered undesirable. These types of taxes are levied by the government to discourage individuals from partaking in such activities without making the use of the products illegal. Like other taxes, sin tax also provides a source of government revenue.

Since the Senate wants to pass or reform the Sin Tax Bill for some reasons like discouraging youth or people from smoking and alcohol drinking, for health purposes and the like, it has been an issue. According to Snowdan (2012), taxes on tobacco and alcoholic beverages are doubly regressive because they are disproportionally consumed by people on lower incomes, or the poor. According also to some research, a heavy smoker or an alcoholic is unlikely to lessen consumption because of an increase in price; making sin taxes an unreliable way of reducing consumption or improving public health. Thinking on taxing vices, sin taxes will really be an effective way to convince people from drinking alcoholic beverages. Thus, an increase in tobacco prices has a little or a small effect on using these vices because it is inelastic. The objective of this paper is to know if sin tax levied on tobacco really discourage the mass, especially the poor, from smoking

A. Historical Background

1. Foreign History

Antismoking advocates tout this month’s record increase in the federal cigarette-tax rate, which on April 1 spiked from 39¢ to $1.01 per pack, as a move that will bolster the federal budget while saving an estimated 900,000 lives. Supporters say the measure will stop 2 million kids from lighting up and spur about 1 million adults to quit, but the sharp hike has some smokers fuming. Cigarette taxes, detractors argue, are a way for governments to line their coffers by legislating personal choice–and a prime example of a regressive “sin tax,” the term often used for fees tacked on to popular vices like drinking, gambling and smoking.

The sin tax is an established tactic. In the early 1500s, Pope Leo X underwrote his lavish lifestyle in part by taxing licensed prostitutes, and Peter the Great preyed on Russian vanity two centuries later by charging men who grew beards. In the Federalist papers, American patriot Alexander Hamilton proposed an excise tax on alcohol to boost revenues and curb consumption. The measure, enacted in 1791, sparked the Whiskey Rebellion, in which federal authorities were forced to quash an uprising by livid Pennsylvania settlers.

The U.S. has taxed cigarettes since the Civil War, although its levies often lag behind those assessed by other nations. This month’s increase–signed by a President who’s trying to kick the habit himself–comes as recession-battered states are considering charges on everything from pornography to marijuana as a way to pad their budgets. Tobacco taxation enjoys broad public support, but other recent efforts to impose sin taxes have sputtered. Proof, perhaps, that in trying times, doing bad can feel really good.

2. Local History

Barely four months after she became President of the Philippines, Corazon C. Aquino issued Executive Order No. 22 on 25 June 1986. This order increased the taxes on cigars and cigarettes and all alcoholic drinks to approximate world level taxation on these items where the tax component was about 50 percent of the retail price (Aquino 1986). Taxes on alcoholic drinks, for example, were increased to one peso per bottle, up from sixty nine-centavos (P 0.69) under a purely ad valorem formula where the tax was about 50 percent of the wholesale selling price without the tax (De Leon 1983; Matic 1973, 2; Yoingco 1985, 50). The taxes collected from alcoholic drinks and tobacco were called “sin taxes,” presumably because these items were considered as “sin products.” The manifest and most dominant objective of Executive Order No. 22 was clearly economic. In the rationalization of the imposition of the increased taxes, this objective was paramount.

At the time, there was an urgent need to increase revenue collection to help rebuild a plundered economy which was on the brink of collapse when Aquino assumed office as the new President of the country. With the passage of the tax measures on tobacco and alcohol, the govemment hoped to collect by the end of 1986 an additional P2.9 billion from cigarette factories alone, and another I750 million from the beer and liquor companies (Yoingco 1985, 50). Although unstated and only vaguely hinted at, it is safe to say that the policy makers anticipated that the subsequent increases on the prices of these “sin products,” considered hazardous and nonessential, would also influence the consumption behavior of the public.

More specifically, the policy makers thought that with the increase in the prices of tobacco and alcohol, people would be compelled to rechannel expenses from the hazardous practice of smoking and drinking to other more healthful and economically productive practices such as saving and spending money for essentials as food, medical care, and education of children.

Given the research evidence on the patterns of expenditures of Filipino families, it appears that there was considerable good reason for this tacit social objective of Executive Order No. 22. In a nineteen-year (1957-75) nationwide study of the expenditures of Filipino families, for example, the Fund for Assistance to Private Education (FAPE), found that tobacco and alcoholic drinks ranked as the third highest expense of all Filipino families. Expenses for the education of children, however, consistently ranked as the seventh and last item of expense for all the nineteen-year period of the study (Dumlao and Arcelo 1979, 71-89).

Food, clothing and shelter, understandably, were the highest priority items of expense (Dumlao & Arcelo 1979, 71-89). While the priority allocated for food and clothing is rationally comprehensible, it is extremely difficult to understand why cigarettes and alcohol should be a sizeable portion of the family income (Dumlao & Arcelo 1979, 71-89). For a nation that places a high premium on education, the finding that education is given a rather low priority in the expense allocation of the family seems rather odd and illogical. On a worldwide level, the Philippines ranks as second only to the United States in terms of the proportion of the population of school age who are in school (Hunt 1966).

An even more disturbing aspect of the FAPE study was the finding that lower income groups in fact spent proportionately more money for alcohol and tobacco. This pattern was true in all the regions covered by the study (Dumlao & Arcelo 1979, 71-89). The pattern of expenditure allocation of the Filipino family has not changed much in recent times. In 1985, the National Census and Statistics Office reported that for that year, only 2.1 percent of the income of a Filipino family was spent on medical care such as doctofs fees, medicine and hospitalization, while 3.4 percent were spent for tobacco and alcoholic drinks (Casayuran 1991, 9; Carlos 1987; Alparce 1986, 11). What this means is that for every PlOO pesos that a Filipino family earns, only P2.10 are spent for medical care while P3.40 are spent for tobacco and alcohol (Carlos 1987).

The appetite for drinking and smoking among Filipino families may be gleaned from the following statistics. In 1987, the national consumption of beer alone was estimated at eight million hectoliters (Alparce 1986, 11). Eight million hectoliter is equivalent to 2.3 million bottles of beer. Therefore, computed per bottle at the 1987 price level of beer, the total expense of Filipino families for beer alone translates to about P14, 950,000. In addition to locally distilled alcoholic products, available statistics on volume and amount of imported liquors indicate that the Filipinos’ thirst for alcoholic drinks extends to those brewed and distilled in other countries and is just as staggering as their thirst for the local ones. In 1987, for instance, the Philippines imported an average of P3 million worth of liquor (Carlos 1987).

Considerations of the physical health of the smoking and drinking population are also implied in the imposition of higher taxes on tobacco and alcohol. Research evidence all over the world now unequivocally show that smoking is definitely hazardous to one’s physical health (Cruz 1987,7). Dr. Judith McKay of the World Health Organization, for example, estimates that at the end of this century “at least two million Filipinos will eventually be killed by cigarettes.” Noting that smoking already poses a major threat to our national health, Dr. McKay recommended the increase in the taxes on tobacco as one of the measures to curb the practice and protect the public (Cruz 1987, 7; Rodriguez 1987, 1, 13).

B. Operational Definition

1. Sin Tax A sin tax is a kind of sumptuary tax: a tax specifically levied on certain generally socially proscribed goods and services, for example alcohol and tobacco, candies, soft drinks, fast foods, coffee, and gambling. 2. Addiction

The state of being enslaved to a habit or practice or to somethingthat is psychologically or physically habit-forming, as narcotics, to such an extent that its cessation causes severe trauma. 3. Ciggarette

A cylindrical roll of finely cut tobacco cured for smoking,considerably smaller than most cigars and usually wrapped in thinwhite paper. 4. Liquor a distilled or spirituous beverage, as brandy or whiskey, asdistinguished from a fermented beverage, as wine or beer. 5. Alcohol Whiskey, gin, vodka, or any other intoxicating liquorcontaining this liquid.

II. Supporting Facts

1. Smoking cigars and drinking liquors are bad to health. “This is not just a sin tax. This is an anti-cancer tax.” Smoking is bad to our health. it contains a certain drug called Nicotine. Nicotine is an alkaloid found in the nightshade family of plants (Solanaceae) that acts as a nicotinic acetylcholine agonist and a monoamine oxidase inhibitor. Nicotine not only increases blood pressure and heart rate in humans, but it also mimics the venous endothelial dysfunction caused by smoking.

Nicotine can stimulate abnormal proliferation of vascular endothelial cells, similar to that seen in atherosclerosis. Nicotine induces potentially atherogenic genes in human coronary artery endothelial cells. Nicotine could cause microvascular injury through its action on nicotinic acetylcholine receptors (nAChRs), however other mechanisms are also likely at play. Among the youth who smoke in the Philippines, 17.5% are girls and 28.3% are boys aged 13-15 years. Currently 17.3 million Filipino adults are smoking – 47.6% of men 9.0% of women.

Lung cancer is the leading form of cancer among men in the Philippines. This is attributed to smoking and high levels of exposure to second hand smoke. Every hour, one person dies from lung cancer in the Philippines. The World Health Organization estimates that a fourth of all types of cancers can be attributed to smoking. Tobacco is responsible for 71 percent of lung cancer deaths in the world. About half of all men in the Philippines are currently smoking.

It will not be surprising to see an epidemic of lung cancer among the male workforce within the next ten to fifteen years. Lung cancer rates among women could also increase due to exposure to second hand smoke. This will result in premature deaths and may leave many children orphaned. This will also cost the Philippines billions of pesos for health care, chemotherapy and palliative care. A major lung cancer epidemic will be a burden on the health care system and could deplete resources for universal health care. Efforts need to focus on prevention.

A study in 2008 showed that 11 percent of all deaths in the Philippines were attributed to cancer. “We expect the deaths from cancer to increase. If we do not act now, this could become a full blown epidemic with numerous early deaths for our workforce.” Cigarette smoke contains nearly 4,000 chemicals of which 60 are proven cancer-causing agents1. We cannot stand idle as 60 carcinogens are easily and legitimately available for everyone to enjoy. We deplore how tobacco can be an easily accessible and generally affordable commodity for everyone’s death, disease, addiction and self-destruction.

Ten Filipinos die from tobacco use every hour. Smoking is the most common risk factor associated with deaths due to stroke and heart attack in the Philippines. CIGARETTE SMOKING KILLS – nearly 87,600 Filipinos every year (or 240 deaths every day) 2 – which is HIGHER than other risk factors like diabetes, hypertension, obesity and high cholesterol. As a tobacco-growing country, the Philippines has one of the highest prevalence rates of smoking in the Western Pacific Region. Based on the 7th National Nutrition and Health Survey II (NNHeS II, 2008), the prevalence of smoking remains alarmingly high at 31% – thus, an estimated 25 million of the population aged 18 years are current and previous smokers.

The 2009 Philippines Global Adult Tobacco Survey (GATS) estimates that more than 17 million of the population aged 15 years and above currently smoke tobacco. SEVEN out the ten leading causes of mortality in the Philippines are smoking-related. Based on only four smoking-related illnesses (lung cancer, cardiovascular diseases, coronary artery disease and chronic obstructive pulmonary disease), the economic burden due to healthcare costs and productivity losses amount to a staggering 218 to 416 billion pesos annually2. The Southeast Asia Tobacco Control Alliance (SEATCA) noted that a 70% increase in the price of tobacco could prevent up to a quarter of all smoking-related deaths worldwide. Liquors are bad to health also. It Increases the risk of cancer in the liver, pancreas, rectum, breast, mouth, pharynx, larynx and esophagus. it affects many part of the body like heart, kidney, liver, and many more.

2. Number of accidents will be lessen. Alcohol is a major cause of accidents and accidental injury. The presence of alcohol in the body has also been shown to increase the severity of injuries from accidents1. For these reasons alcohol consumption is normally closely regulated in relation to the operation of transport systems and other safety sensitive environments and activities.

Internationally, alcohol has been shown to be a frequent factor in accidental injury in the home, on the roads, in workplaces and during leisure-time activities, and to be a cause of falls, collisions, fires and drownings. For example, a study of 43 fatal falls in Frankfurt, Germany2 found that 23 of the deaths (53.5%) were preceded by ‘heavy drinking’. Alcohol is also a cause of death from accidental overdose. Estimates of the proportion of deaths that occur in people who have been drinking range from 35-63% for falls to 21-47% for drownings and 12-61% for burns, with lower figures for non-fatal accidents.

Because of the SIN TAX, number of accidents may be lessen. Research shows that the main reasons of many accidents nowadays is because of drinking. Many people drive while they’re drunk and results to car accident. Many people kill or hurt some because they’re drunk. Many people commit suicide because in that time of depression, they’re drunk. Why are these happening? Because when you’re drunk, you’re not in yourself. You can’t think straight and decide right. For smoking, it will lessen the number of people that were infected by the disease cause of smoking. 3. Lessen the number of users.

Users will have a limited usage of cigars and liquors. Instead of spending money for addiction, people will use their money for more important needs. If the price were set higher, then they will focuse now on buying important needs like food, dress, water, etc. Philippines has one of the lowest prices of cigarettes (and alcohol) in the Asian region, which gives the poor and the youth easy access to both. Compared with many other Asian neighbors, the Philippines has the highest per capita consumption of cigarettes in 2007, one of the lowest prices of cigarettes and the lowest taxes imposed

4. Lifestyle-related diseases affect both rich and poor, but most unfortunately, especially the poor. Smoking rates are highest among the poor in the Asean region, who will suffer from the cost of long-term treatment and unhealthy lifestyles. The poorest sector spends more for tobacco than for education, clothing, even for health. 4. It may cause air pollution.

Cigarettes may cause air pollution. the smoke released by cigarettes affects the ozone layer. it also affects many living things like plants, animal and especially man. Second hand-smoker is a state when the people inhaled the smoke released by the main smoker. this is much dangerous than the first hand smoker. If the first hand smoker have some lung problems, there are some big chance that the second hand smoker will carry the disease. 5. It may stop the production of cigars and liquors.

The company that sells the said products will have a lower income because the number of buyers will be lessen because of high price. The company will closed because they will be bankrupt.

Summary Governments have long relied on indirect taxes on consumer goods as a source of revenue. ‘Sinful’ items such as alcohol and tobacco have traditionally been taxed punitively and some have called for new taxes on fatty foods and sugary drinks, as well as a minimum price on a unit of alcohol.

Campaigners and politicians often cite astronomical figures as being the ‘cost to the taxpayer’ of certain products, but these statements have no foundation in economics. The studies which produce these figures are dominated by ‘costs’ which are neither financial nor borne by the taxpayer. They include hypothetical estimates of the value of a life year lost, earnings forgone due to premature mortality and expenditure by the consumer on the product itself. These figures are usually inflated, but even when they are plausible they cannot be used to justify sin taxes because these ‘costs’ affect only the individual; they are not paid by the taxpayer.

It is frequently claimed that consumers of ‘unhealthy’ products place an excessive burden on public services—healthcare, in particular—and that this justifies additional taxation in order to (a) reduce consumption of the sinful product, and (b) reimburse the state for the extra money it is forced to spend. This is not true. There is ample evidence that, on average, smokers and the obese are less of a ‘drain on public services’ than nonsmokers and the slim because they spend fewer years withdrawing pensions, prescriptions, nursing home provision and other benefits. Their lifetime healthcare costs are usually lower than those who lead ‘healthy lives’. If making consumers pay their way is truly the aim of public policy, the government would be more justified in placing a tax on fruit and vegetables.

The case of alcohol differs from that of tobacco and ‘unhealthy’ food in so far as there are additional externalities relating to violence, drink-driving and property damage. It is likely that drinking and drunkenness result in additional costs to the public purse which are not offset by savings and benefits, but these are covered by existing alcohol taxes with several billion pounds to spare. Just as smokers are subsidising nonsmokers, so drinkers are subsidising teetotallers.

As instruments of social engineering, sin taxes are blunt tools which are largely ignored by the target group while creating a range of unintended consequences which damage health, stoke criminality and, beyond a certain point, lead to the government receiving less tax revenue. They are a costly and inefficient means of attempting behavioural change.

Taxing goods which are price inelastic, especially those which are addictive, is far more likely to impoverish consumers than it is to turn them into abstainers. Alcoholics are rarely deterred from drinking by higher prices and there is evidence that tobacco taxes are now so high that further increases will yield diminishing returns. Many studies have concluded that ‘fat taxes’ and ‘soda taxes’ have little or no effect on rates of obesity. Such levies are better seen as stealth taxes than sin taxes.

Like virtually all indirect taxation, sin taxes hit the poor harder than the rich. Taxes on tobacco, sugar-sweetened drinks and ‘junk food’ are doubly regressive because they are disproportionally consumed by people on lower incomes. Placing a minimum price on alcohol would be extraordinarily regressive since it would deliberately target drinks which are consumed by the poor while leaving the drinks of the rich untouched.

This is a paper I’ve been working on since October, inspired by the Danish government’s decision to bring in a ‘fat tax’, France’s decision to introduce a ‘soda tax’ and Scotland’s decision to bring in minimum pricing (a sin tax by any other name).

For me, the most interesting part was looking at the studies which estimate the ‘cost to society’ of various activities. It is clear that the politicians who cite these reports have never read them, or else they do not understand the difference between private costs and public costs. None of these studies support the view that slim, teetotal, nonsmoking taxpayers subsidise the habits of others. Existing taxes on these products far exceed the various public costs incurred. Indeed, with the possible exception of alcohol, there is no economic justification for taxing these products beyond the normal rate of sales tax at all.

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