Taxing the poor

The South African Treasury says that its proposed excise tax on sugar-sweetened beverages (SSBs) is intended to lower sugar consumption and obesity rates. It has not shown any intention to offset the revenue that will be generated from the SSB tax by lowering or eliminating other consumer taxes. If the excise is not in fact regarded as a revenue-raising opportunity, one would expect the tax to be revenue neutral.

Irrespective of what the Treasury may intend, taxing specific food or beverages often creates complex consequences. The people who spend the largest proportion of their income on food and beverages are usually the poorest. Calories are essential to everyone – and it is usually the poorest members of society who have to spend the highest proportion of their limited incomes to obtain the calories they need.

Unless a particular type of food or beverage is disproportionately consumed by the rich (truffles or champagne, for example), then taxing that good will be regressive and will impact low-income families the most. The Treasury’s proposed excise tax on SSBs is regressive and will worsen inequality.

Its regressive impact will be compounded by the narrower range of purchasing choices and retail outlets usually available to poor households. Wealthier households will more easily be able to avoid the tax by switching to substitute goods, but the poor generally find it more difficult to change their consumption patterns. This is partly because lower-income households have limited budgets, which narrow the range of their purchasing choices. In addition, low-income neighbourhoods characteristically have fewer retail and food outlet options. More limited options make it more difficult to change consumption patterns.

In addition, lower socio-economic groups obtain a greater proportion of their energy intake from SSBs. They also spend a greater proportion of their income on food and drinks. Hence, the burden of the SSB tax will fall most heavily on the poor.

Regressive taxes are of great concern in a country with high income inequality. The government should not assume that negligible or no harm will be caused by the excise tax.  South Africa’s Gini coefficient already stands at 0.69, giving the country one of the highest levels of income-inequality in the world. The proposed excise will raise billions of rands for the government: roughly R10.5bn a year, based on 2015 sales of the SSBs to be made subject to the tax. However, this revenue-raising exercise will impose a significant – and disproportionate – tax burden on the poor.

The 20% SSB tax will be payable by producers and importers, but will clearly have a major impact on retail prices too. This impact could also fall more heavily on the poor. The Treasury seems to be assuming that all retailers will pass the increased price resulting from the tax fully on to all consumers. However, experience in France – which introduced an SSB tax in 2012 – shows that this may not be so.

In France, price competition between large retailing groups made them reluctant to pass the tax increases fully on to their customers, for fear of losing market share. Given their size, they were able to negotiate with producers to absorb some of the price increase themselves and pass on less of it to them. Given their overall profitability, these big retailers were also able to absorb some of increases that were passed through to them, so as to limit price increases for their customers. This reduced their profit margins to some extent, but it helped them keep up their SSB sales.

However, smaller retailers did not have these options. Given their small size, they did not have the same bargaining power with producers. Moreover, given their limited profitability, they could not easily absorb some of the tax so as to help retain their SSB sales. Hence, the smaller retailers were disproportionately affected by the tax.

If the Treasury’s proposed SSB tax is introduced in South Africa, many smaller retailers, ‘spaza’ shops, and informal traders will have their incomes negatively impacted. So too, of course, will the lower-income households to which they primarily sell. The tax will thus widen the gap between the rich and the poor.

Worse still, the SSB taxes that have been implemented in different countries have had no measurable impact in reducing obesity. Hence, the negative impact on the poor will not be counter-balanced by any health benefit from the tax.

By contrast, policies to promote economic growth and improve education would be far more effective in empowering people to live healthier lives. The proposed SSB tax should be scrapped in favour of alternatives that will help, rather than harm, the poor.

Kerwin Lebone is Head of the Centre of Risk Analysis at the Institute for Race Relations.