Why a sugar tax would break our tax system

A business think tank doesn’t like the idea of politicians effin’ around the edges:

It is very, very easy to break a beautiful tax system. Here is the recipe for doing it.

Start by finding some product that seems a little frivolous – a bit of a luxury – and preferably one that’s mostly used by people that the typical voter does not really like anyway. Say, for example, the fancy beard oil used by hipsters to maintain their elegant facial appendages.

Then, find some cause that nobody could object to. Something really motherhood and feijoa pie. Tieke recovery. Who doesn’t love the New Zealand saddleback and support its recovery? Nobody.

Add the two together and propose a tax on hipster beard oil to help fund Tieke recovery programmes. Who could object? Hipsters are at best a mild nuisance, and at worst a looming threat to national identity; beard oil seems the height of frivolous consumption; and Tieke are a perennial entry in Bird of the Year competitions.

The bundle is an economic abomination. If Tieke recovery is the best use of the next public dollar, it is best regardless of whether we tax hipsters’ beard oil. And if a tax on hipsters’ beard oil is the most efficient next tax to impose, then the government should tax it regardless of whether the money raised is used to cut other taxes, fund Tieke recovery, or fund something else entirely.

But none of that much matters. Treasury would scream, because economists know that these kinds of taxes are abominations. But Labour dismissed Treasury critiques as ideological burps, and National’s Gerry Brownlee has been no less dismissive of sound Treasury analysis. Politics rules in the end.

One of the dangers of political pressure is that it makes for bad solutions.  

Taxing beard oil may sound frivolous, but consider campaigns to tax soda, or sugar, to fund public health campaigns. If a soda tax makes sense, then it makes sense regardless of whether the public health campaigns are the best use of funds. And if the public health campaigns are that valuable, why is the government not already cutting other less beneficial programmes to fund it?

The answer of course is that public health campaigns worth running are already largely being tried, and that a soda tax makes little economic sense – as Jenesa Jeram shows in her report, The Health of the State, released recently by The New Zealand Initiative. Putting the tax and the health campaigns together hardly improves the economics of the tax-and-spend bundle, but does make the package more politically appealing.

But there are a near infinite number of tax-and-spend bundles you could imagine that all sound very politically appealing. Tax fancy coffee drinks (frappucinos, not flat whites) to fund cataract surgery for grandmothers. Tax charging cables for the latest model of iPhone to fund breakfast in schools programmes. Tax USB-powered desk toys to help find homes for cute kittens so they are not put down by the animal shelter. Kittens!

Tax bloggers to subsidise failing mass-media companies?

Who could object to any of these but a cold-hearted economist – or anyone who spends a minute to think through the administrative burden imposed by a ridiculous morass of taxes each designated for a different bucket regardless of whether need is greater in other areas.

For the moment, those in charge of New Zealand haven’t been seduced by the tax and ban plans, but if Labour eventually get back in the hot seat, and they do so with their current economic and social outlook, it would be fair to expect a large number of suicides among cold-hearted economists as they won’t be able to cope with the destruction of a system that has proven itself to be fairly cost effective to implement and simple to follow.


– Eric Crampton, Dominion Post


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  • powderburns

    I was shocked to queue up in Countdown on the weekend in a “sugar free” express checkout lane.

    Abashed, I took my sugary items to the slow lane. Donned the yellow star. Could imagine a no-coloureds sign pretty easy.

    • exactchange

      I think that just means no display of lollies.

  • Platinum Fox

    I’ve always avoided the chemical artificial sweeteners whenever I can.
    I’ve switched from adding fizzy mixer to my rum to adding filtered water and an NZ-made “lite” lime “juice” sweetened with Stevia that claims to have 46% less sugar than ordinary lime “juice”. I guess it could be fizzed up by running the water through a sodastream.

  • Dog Breath

    I have a work colleague who has taken personal responsibility for himself and is currently trying a diet with significantly reduced sugar intake. Incredibly some vegetables have significant sugar content so are being eaten in moderation. He has been at it for about 8 weeks and has lost 9kg with no other changes I.e no extra excercise or other food intake changes just the sugar. Pretty impressive result.

  • biscuit barrel

    Perfect tax system will be broken ? Thats a laugh.

    What about the extra taxes on petrol, and the extra taxes on tobacco ( and increasing every year), extra taxes on alcohol.

    Did someone mention land tax today- was he connected to the government ?

    Then there was the 2005 change so that bank charges werent taxed by GST ? What was that about except carving out an exception for a special group. Even mortgage brokers fees are zero rated for GST ( paid by banks mostly)
    capital gains tax does apply now with 2 years, who knew we had one

    So we have a perfect tax system, pleeeese

    • jonno1

      Financial services have never attracted GST. This flows through to residential rents, presumably on the basis that rent is a surrogate for mortgage payments (although the poor landlord can’t claim back the GST on rates, insurance, repairs etc).
      One anomaly gets up my nose: bank charges on merchant fees. These are calculated on the GST-inclusive amount even though the trader doesn’t retain the GST. So the percentage charge is greater than the nominal rate.