It's a sin, alcohol and tobacco taxes punish poor

ECONOMICS EXTRA

THE ECONOMY THIS WEEK

Alcohol, tobacco and gambling have the highest levels of tax of any goods and services.

The cascading effect of State and Commonwealth taxes brings the total tax on wine, the most favourably treated of these goods and services, to 41 per cent of wholesale value.

This is comparable to the burden on luxury cars, the other most highly taxed goods.

The tax rate on gambling exceeds that on luxury cars.  Beer pays 91 per cent, while spirits and tobacco pay a massive 253 per cent and 339 per cent respectively.

The 1996-97 Budget left these taxes virtually unchanged but in recent years State and Commonwealth Budgets have substantially increased the tax rates on these products, especially on tobacco.

The ground for this has been cleared by a resurgent and largely taxpayer-funded anti-smoking campaign.

There is nothing so attractive to governments as a popular tax, and they have moved with the effortless grace of an Olympic synchronised swimming team to exploit this.

In their incidence, these "luxury taxes" strike at a relatively narrow group of consumers.  In doing so, they are highly regressive, impacting with particular severity on lower-income earners.

The extent of this is not easy to track since survey respondents consistently understate their expenditures on these goods and services.  The Household Expenditure Survey of the Australian Bureau of Statistics accounts for only 65 per cent of consumption on alcohol, 61 per cent on tobacco and 25 per cent on gaming.  The identification of only 25 per cent of gaming expenditure presents particular analytical problems.

Re-allocating the unrecorded expenditure in the same proportions as the recorded expenditure shows the following shares of income taken by these goods and services.

The lowest 20 per cent of households by income spend 25.6 per cent of their income on alcohol, tobacco and gambling;  the second lowest 20 per cent spend 15.2 per cent;  the next 20 per cent spend 11 per cent;  the next, 7.5 per cent;  and the highest spend 5.3 per cent.

By factoring in the tax rates on these goods and services, we can gain a good estimate of the tax paid by each income strata.  The result shows that the discriminatory taxes on tobacco, alcohol and gambling fall particularly heavily on poorer people.  On average, those having the lowest fifth of income levels pay about $15 a week in taxes on these goods and services, nearly half as much as those whose income is 10 times as great.

Put differently, the lowest income category is paying 10 per cent of their income in taxes on alcohol, tobacco and gambling while the highest income category is paying only 2 per cent.

These different payment outcomes are illustrated in the accompanying graph.

Not only are the taxes on these goods and services extortionate, but their design is skewed so that the impact is heaviest on the less affluent.

This is most apparent in the case of alcohol where beer, the preferred beverage of the less well-off, is taxed at more than twice the rate of wine, the preferred beverage of the better off.

The punitive tax rates on goods and services that are consumed so relatively heavily by those on the lowest incomes is an indictment of the fairness which purports to be one of the overriding goals of taxation.

It is remarkable that so few voices among those challenging the equity of the present tax system are raised against the very taxes that impact most heavily on the poor.

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