Sweet Tax in Ukraine

According to the recent Tax code update, Ukrainians should pay more for alcohol & tobacco products in 2016

Author:

According to the recent Tax code update, Ukrainians should pay more for alcohol & tobacco products in 2016. The excise taxes have increased steeply: tobacco products – by 40%, low alcohol beverages – by 300%, beer and wine – by 100%, alcohol beverages – by 50%. The expected contribution to Ukraine’s 2016 budget of these increased tax rates is projected at 18.1 billions UAH. Vice taxes thus have the potential to generate substantial revenues for the Ukrainian budget, so the Ukrainian government might well want to consider additional vice taxes.

You may try high-tax and low-tax, but all the time you will have sin-tax and more sin than tax. 

— George W. Bain 

For example, sugar’s harmful effects are only slightly different from the tobacco and alcohol. Thus, why not tax sugar products? There are many points in support of this view.

First, consider the economics of the “sweet-fiscal” question. There is an existing “sin tax” concept. “Sin tax is an excise tax specifically levied on certain goods deemed harmful to society, for example, alcohol and tobacco, candies, drugs, soft drinks, fast foods, coffee, and gambling” [1]. There are some persuasive reasons to raise sin tax rates rather than raise other taxes in case of budget deficits:

  • the tax charges only “sin product” consumers,
  • the tax is easily accepted by the public,
  • the tax stimulates healthy behavior,
  • the tax could be a significant source of revenue.

In addition, “vice products” consumers impose a negative externality on the rest of society because the government will have to carry a higher burden of healthcare costs. In short, a tax for “unhealthy products” consumers seems fair.

Second, consider addiction for sweets compared to tobacco and alcohol dependence. According to the United Nations research [Link], noninfectious diseases such as heart disease, cancer and diabetes exceeded infectious in 2011. Every 7 seconds, 1 person dies from diabetes in the world. Unfortunately, about 5% Ukraine’s population is ill with diabetes. The number of Ukrainians with diabetes doubled over the last 10 years and will go up with 5% rate per year. According to the British Fund research: “a 20 percent tax on sugary soda reduces the number of obese people by 1.3%, and overweight people by 0.9%” [2].

Third, a number of countries around the world implemented taxes on sugar, as a fiscal and public health instrument. For instance, Finland imposes a tax of $0.90 per kilogram or $0.10 per liter on sweets, chocolate, cocoa-based products and ice cream. Hungarians pay tax on soft drinks, energy drinks and pre-packed sweetened products and salty snacks. France levies a $0.08 per litre tax on all sugar drinks . Some US states have imposed extra 3-7% excise on fizzy drinks. Currently, sugar tax is the center of a debate between Jamie Oliver (a celebrity chef) and the Prime Minister David Cameron in UK. The chef said: “ the 10% sugar tax for Mexicans (4th biggest sugary drinks consumers in the world, 225 liters per year vs. 30 liters per year for Ukrainians) led to a 6% reduction in sales of sugary drinks and a similar policy in England would cut consumption, at least in the short term” [3].

For these reasons, I would like to propose Ukraine’s “Sweet Tax” excise on confectionery products and fizzy nonalcoholic drinks. With respect to the revenue contribution of the sweet tax, excise rates will vary with the sugar content of products.

As a result, the potential Ukraine’s budget can raise huge sums of money, approximately, 2.5 billion UAH taking into account that consumption will decrease by 20% (average consumption reduction rate based on experience in US , Mexico, Hungary) vs FY 15 actuals and 30% of production exported – not taxed. The forecasted budget revenue is 20% of Ukraine’s Ministry of Health budget 2016 or 1.8 budgets of the Ukraine’s Ministry of Youth and Sports 2016 (Table 1).

Table 1. “Sweet Tax” impact estimation on the Ukraine’s budget

Levied product FY 15 Ukraine industry production X Proposed average excise rate X 50%= Budget Revenue
Confectionary :

Chocolate

Cookie

Biscuit

Total confectionary

162 million kg

228 million kg

173 million kg

563 million kg

5 UAH per kilogram 1.4 billion UAH
Fizzy drinks

(nonalcoholic)

1100 million liters 2 UAH per liter 1.1 billion UAH
Total 2.5 billion UAH

Source : State Statistics Service of Ukraine

In summary, it seems reasonable to expect that “sweet tax” will be a win-win strategy for the government and society in Ukraine. Consumption of confectionery and fizzy drinks may be as detrimental for health as consumption of tobacco and alcohol. A tax on high-sugar products can reduce incidence of diabetes and other diseases; thus improving public health and protecting the public from “the sweet death”. The revenue raised by the “sweet tax” will make use of funding for Ukraine’s health care and sports.

The article got the special prize in the December round of MindSketch

Notes


Disclaimer

The author doesn`t work for, consult to, own shares in or receive funding from any company or organization that would benefit from this article, and have no relevant affiliations