The Preventative Health Taskforce has suggested a range of additional taxes to overcome the obesity crisis, the smoking crisis and the alcohol crisis. Let’s accept for a moment that there is a health crisis, despite Australians living longer, healthier and happier lives than ever before. Is taxation the solution?

Paying more money to the government is seldom, if ever, the solution to social problems — or any other problem. Yet there is a strand of vulgar economics that suggests that this is precisely the solution to all problems. To be fair, there is a theory in economics, associated with the great English economist Arthur Cecil Pigou, that suggests that if social costs are greater than social benefits that activity should be taxed, and if social benefits are greater than private benefits that activity should be subsidised.

The logic of this argument relates to downward sloping demand curves. As long as higher prices lead to less consumption, a tax on that activity will lead to less of it. This of course is one of the arguments against high rates of income tax — it undermines the work ethic. The important question is whether taxation is the best price signal that public policy can generate.

Let’s think about smoking tobacco. It is true that smoking has adverse health effects on smokers and non-smokers. This is well-known and has broad acceptance and understanding in the community and the incidence of smoking in the community has fallen dramatically in recent years. At the recent Henry Review Tax Conference Sijbren Cnossen made the argument that smokers pay for themselves. After you tally up all the additional taxes and consider reduced life expectancy and the like, smokers are not a net burden on society. In economic terms there is no smoking externality in equilibrium. To be sure non-smokers are not being compensated by smokers, but smokers have paid the government in full for their habit. Raising additional taxation on smokers is then just an exercise in revenue raising. There might be a case for that, but let’s not pretend this is a health measure.

In contrast to the hysteria over tobacco, alcohol abuse has far greater social costs associated with it. Alcohol abuse leads to all manner of anti-social and non-co-operative behaviour. It is not clear that drinkers pay the full social costs of their behaviour.

Does this mean that alcohol excise should be increased? Only if we believe that drinkers should pay for their anti-social behaviour in monetary terms. It is not clear that increasing the monetary cost of alcohol has a large impact on consumption. To the extent that it doesn’t, drinkers simply swell the coffers of the federal government while state government agencies clean up the mess.

Economists can calculate a monetary value of street brawls with the police and so on. But we don’t want to be compensated for urban violence — we want it to stop. Furthermore, many people would be doubtful that an economic estimate of these costs fully captures the human cost of anti-social behaviour. It can’t really be measured at a personal level. An increase in alcohol excise can only ever be used to heal the physical damage.

This is not to suggest that economics can’t offer a solution to anti-social behaviour. When the profit motive cannot operate well, there are bureaucratic solutions that can be employed. The education system is one such solution; government and community groups have undertaken massive education programs with some success. Another bureaucratic process is the criminal justice system. This, too, raises the price of anti-social behaviour but does not swell the coffers of government. So far the authorities have targeted venues — raising the price of liquor licences across the country. But unless these licence increases directly translate into more police resources, such a measure will be little more than punitive. Increased taxation of alcohol itself, and by implication increased health spending, may benefit the medical profession but it is not clear it will solve the social problems associated with alcohol abuse.

Sinclair Davidson is a professor in the School of Economics, Finance and Marketing at RMIT University and a senior Fellow at the Institute of Public Affairs.

Peter Fray

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