High sin taxes bad for economic health


PETALING JAYA: Two economists have spoken against heavy taxation of alcohol and cigarettes, saying it won’t reduce their consumption when enforcement against black markets is weak.

They said the high taxes on these commodities had already resulted in increased smuggling and consumption of contraband.

Firdaos Rosli, a fellow in economics at the Institute of Strategic and International Studies Malaysia, said any increase in taxes or supply restrictions such as limiting the point of sale would see people searching for loopholes.

He also warned that a tax increase would mean a higher enforcement cost because there would be a need for more manpower and assets.

“If there is strong enforcement, then high sin taxes would work,” he said. “But without effective enforcement, as it is in Malaysia, we will create an environment where people are tempted to circumvent the law or make a living out of it.”

Firdaos said people in developed nations would be less willing to break the law by smuggling or buying contraband because of strong enforcement.

According to him, when law enforcement is weak and people see sin taxes as too high, the informal economic sector – involving the smuggling, distribution and sale of contraband goods – would thrive.

“Either way, someone will be making money. If there is no contraband due to strong enforcement, then those in the formal sector would profit. If the contraband market is big, then those in the informal sector will make money.”

Yeah Kim Leng, a professor of economics at Sunway University Business School, said it was difficult to find an optimal level for sin taxes as a deterrent.

If these taxes were too high, he said, smuggling of contraband would increase, causing a loss in tax revenue.

“The problem with contraband is that their production is not regulated by our authorities,” he said. “So, we do not know what they contain and this can have an adverse effect on health.”

This would result in increased costs to the public health sector, he added.

He said the best deterrent would still be education. “If the government wants to promote a healthier lifestyle, then sin taxes should be combined with education and awareness efforts, as well as incentives for the people to live a healthier lifestyle.”

In June, JTI International Bhd’s managing director, Guilherme Silva, voiced his concern to The Star over the illicit cigarette trade in the country.

He said Health Ministry statistics covering the years 2011 to 2015 showed that the number of smokers had increased while the sale of legal cigarettes had decreased by 2.7 billion cigarettes.

He pointed out that this indicated an increase in the consumption of illicit cigarettes.