February 2012

Are Sin Taxes Sinful?

A Policy Paper on Philippine Sin Taxes

Laurence Anthony Go
Researcher, Action for Economic Reforms

Why Sin Taxes are Good

The year 2011 did not bode well for the Philippines. Growth was
sluggish as a result of underspending. The government now needs to
pump prime the economy, which requires more revenue sources other
than plugging the leaks. An attractive proposal is the tax hike for sin
taxes on tobacco and alcohol. Given the very low rate and flawed
structure of sin taxes, it is imperative for the government to review its
policy especially with its current situation Cost-benefit analysis shows
that revamping the current system is more beneficial to society in the
following respects: increased tax revenues, decreased consumption of
sin goods and earmarking of funds for the universal healthcare
program. Therefore, the policy recommendation is to adopt a higher yet
uniform specific tax rate with indexation to inflation and removal of the price
classification freeze. Despite possible objections and drawbacks, there are
policy features that can address these issues. In summary, this policy
paper aims to illustrate the necessity of reforming the sin tax system in
the Philippines, for the economic survival and future growth of the
country. Indeed, taxing sin is no sin at all.

Action for Economic Reforms

Unit 1403 West Trade Center
132 West Avenue, Quezon City, PH
aer@aer.ph

Sin Tax Reforms

Unitary

Transform the sin taxes

to a higher and single
rate.

Specific

To simplify collection,
products will be taxed
per unit or quantity.

Index to
Inflation

Avoid revenue erosion

by making the tax adjust
automatically to inflation

Remove
Price
Freeze

Stop price privileges and

provide a level playing
field for all companies

Earmark

Allocate funds for

universal health care and
tobacco farmers

Are Sin Taxes Sinful? A Policy Paper on Philippine Sin Taxes

February 2012

INTRODUCTION AND SCOPE

Under the Arroyo regime, the government suffered nine years of budget deficit. Starting 2001, Arroyo
assumed a budget gap of 147 billion pesos. Midway through her second term, Arroyo was almost able to
achieve a balancing of the budget. This did not last, however, as the near-end of her term saw the largest
deficit in 14 years as well as a crippled Aquino government inheriting 197 billion pesos of deficit only six
months into the year. Nonetheless, 2010 ended with lower-than-expected deficit at 314 billion pesos. In 2011,
under the Aquino administration, the budget deficit took a turnaround as the January to November figure
decreased to only 96 billion pesos. Does this call for a celebration?

Not if we consider the growth rates during the same period. While the 314 billion deficit brought about the
honeymoon growth rate of 7.6 percent in 2010, it was followed by a more than lackluster growth rate of 3.7
percent for 2011. Except for 2007 (which was an election year), all the other years either had a combination of
low-modest growth and small, sustainable deficits or high growth and excessive deficits.

Are Sin Taxes Sinful? A Policy Paper on Philippine Sin Taxes

February 2012

Given these figures, one might ask: are we in a no-win situation? That is, are strong growth and
sustainable government deficits simultaneously unachievable? In order to answer these questions, we must
first understand how budget deficits arise. There exist two principal reasons behind any budget deficit. On the
one hand, too little taxes and other revenues were collected; while on the other, expenditures augmented as a
result of aggressive government spending. It is a well-known fact in economics that government spending
leads to higher economic growth; however, even spending cannot be used excessively to drive growth.
Overspending may cause unsustainable levels of deficitwhich can prove to be counterproductive for growth.
How then can we spend and grow without the danger of incurring unduly high deficits? We can increase
revenues via taxes so that the government has room to spend more and grow faster.
Taxes are an example of the phrase easier said than done. Although imposing new taxes makes
economic sense, it can prove otherwise in the political arena. Most of the time, taxes are politically unpopular
since these impose a burden on the general populace. Hence, politicians often avoid supporting such revenuegenerating bills especially if there are upcoming elections.
Once again, we find ourselves facing another no-win situation. If taxes are the solution and yet
problematic because they are mostly politically infeasible, what then must be done? Perhaps we can take
comfort in the fact that imposing taxes is not always unpopular. Some taxes are more popular to the general
publicsuch as the topic of this paper: sin taxes.
This paper begins with a discussion of the Philippines in terms of its health-related statistics as well as
the current overall tax structure. Afterwards, it will tackle the economic rationale of imposing sin taxes in
addition to the health dimension of such taxes. The sin tax system will also be explained and its relation to
other countries in the region. A comparison of benefits and costs will be made and from there, policy
suggestions will be presented.
PHILIPPINES: IN SICKNESS AND IN HEALTH
Smoking and drinking are first and foremost health-related activities. The case for levying taxes on these
behaviors relies heavily on scientific studies showing the negative effects of such actions to ones health.
Data from the World Health Organization (WHO) show that in the world, tobacco, the second major cause
of death, is also the single biggest preventable cause of death. In addition, smoking is responsible for the
death of one in ten adults worldwide. More alarming is the fact that half the people that smoke todaythat is
about 650 million peoplewill eventually be killed by tobacco.
In the Philippines, Department of Health (DOH) estimates show that about 87,000 Filipinos die every year
due to tobacco-related diseases. In addition, DOH Secretary Enrique Ona asserts that secondhand smoke
causes a wide range of immediate and long-term adverse health effects, including cancer, serious respiratory
diseases, and cardiovascular diseases.
The Philippines at present enjoys the dubious distinction of having one of the highest smoking
prevalence rates in the world, ranking ninth in adult male smoking population and sixteenth in adult female
smoking population. The latest Global Adult Tobacco Survey (GATS) estimates that 17.3 million Filipinos aged
15 years and over smoke or a prevalence rate of 28.3 percent.

Are Sin Taxes Sinful? A Policy Paper on Philippine Sin Taxes

TABLE 1: GATS RESULTS, 2009

Adult Tobacco Smokers
Overall (%)
Current Tobacco Smokers
28.3
Daily Tobacco Smokers
22.6
Current Manufactured Cigarette Smokers
27.0
Current Hand-rolled Cigarette Smokers
1.9
Current Smokeless Tobacco Users
2.0
Daily Smokeless Tobacco Users
1.4
Source: 2009 Global Adult Tobacco Survey in the Philippines

February 2012

Male (%)
47.7
38.2
46.6
2.3
2.8
1.8

Female (%)
9.0
6.9
7.5
1.6
1.2
1.0

Meanwhile, there is also a surge in the use of tobacco products among the youth with the 2007 Global
Youth Tobacco Survey estimating about 27.3 percent of school children aged 13 to 15 years old are smokers
and marking a 40 percent increase in youth smoking prevalence in a span of four years since 2003. Girls
ranked second place among the worlds heaviest tobacco users while the boys ranked fourth.
TABLE 2: GYTS RESULTS, 2003 AND 2007
Overall (%)
Male (%)
Youth Tobacco Smokers
2003
2007
2003
2007
Current Tobacco Smokers
19.6
27.3
26.5
34.4
Current Cigarette Smokers
15.0
21.7
21.8
29.3
Source: 2003 and 2007 Global Youth Tobacco Survey in the Philippines

Female (%)
2003
2007
13.0
19.6
8.8
13.8

These statistics are particularly alarming given that the global trend on tobacco use is that of declining
smoking prevalence rates in developed countries, while the rate is steadily increasing in developing nations. In
general, smoking prevalence in the Philippines shows an upward trend. To illustrate, adult male prevalence
rate in 2003 represented a 5 percentage point increase from 2001 levels while youth smoking prevalence in
2007 represented an almost 8 percentage point increase from 2003 levels.
According to recent data from the Philippine College of Chest Physicians, 10 Filipinos are dying every
hour, 240 everyday and approximately 88,000 per year because of the aforementioned tobacco-related
diseases.
In 2004, the United States Surgeon General Report (USSGR) cited the epidemiological evidence linking
cigarette smoking to several cancers, cardiovascular and respiratory diseases and other medical conditions.
Although at the moment there is no known cause of death directly and entirely attributable to smoking, several
studies support the earlier proposition that there is sufficient evidence of tobacco smoking causality in the
aforementioned diseases.
Secondhand smoke, composed of side stream smoke produced by a lit smoldering cigarette and the
mainstream smoke exhaled by the smoker, also causes several thousands of deaths among non-smokers,
mostly affecting children who are more vulnerable to secondhand smoke. Components of chemical compounds
in secondhand smoke, including nicotine, carbon monoxide, and tobacco-specific carcinogens, can be
detected in body fluids of exposed nonsmokers. The USSGR pointed out that breathing secondhand smoke for
even a short time can have immediate adverse effect on the cardiovascular system and interfere with the
normal functioning of the heart, blood and vascular systems, increasing the risk of heart attacks. Secondhand
smoke has been found to be the cause of a wide range of illnesses such as cancer and serious respiratory and
cardiovascular diseases. Asthma attacks in children, as well as coughing, mucus build-up, difficulty in
breathing and wheezing, are not uncommon to those who are exposed, though briefly, to secondhand smoke.

Are Sin Taxes Sinful? A Policy Paper on Philippine Sin Taxes

February 2012

In the Philippines, the DOH reported that almost 60 percent of children aged 1315 are already exposed
to secondhand smoke in their own homes. In the most recent GYTS, 54.5 percent of respondents reported
exposure to secondhand smoke in their home, while 64.8 percent reported exposure in public places. An
overwhelming 90.9 percent of respondents, however, think that smoking should be banned in public places.
Adults are also harmed by secondhand smoke. Spouses of smokers who have high secondhand smoke
exposure are at high risk for lung cancer: 30 percent higher risk for husbands of smokers and 20 percent
higher risk for wives of smokers.
The health perils of drinking alcohol, though perhaps less severe than smoking, have significant costs on
the individual and society. Drinking alcohol brings about various economic costs and social problems:
productivity losses, health care expenditures, vehicle accidents, fetal deformities, spousal and child abuse,
violence, crime, accidental falls, fires, drowning and suicides. Statistics are likewise very disheartening. Based
on World Health Organization (WHO) figures, 20 percent and 13 percent of male and female students,
respectively, drank at least one alcoholic beverage on one or more of the past 30 daysan estimate higher
than other countries in the same region. In addition, total per capita alcohol consumption from 20032005 was
estimated to be 6.4 liters in the Philippines, again higher than the regional average.
Echoing the Euromonitor 2011 report, it is said that Filipinos are regarded as heavy drinkers and they
tend to start drinking alcohol on reaching their teens. In 2009, the Department of Health reported that 24
percent of 15-to-19-year-olds are regular drinkers. Another issue is the legal age restriction rule which is
seldom followed and enforced. Consequently, underage drinking is prevalent in the country, and minors can
easily purchase alcoholic drinks due to poor monitoring. In addition, the report states that underage drinking
remained widespread due to the availability of low-priced beer, spirits and RTDs (ready-to-drinks)/high-strength
premixes and ease of access of these products.
Undoubtedly, excessive alcohol consumption is one of the worlds leading health risks. The Global Status
Report on Alcohol and Health from the WHO declares it to be a causal factor in more than 60 major types of
diseases and injuries and results in approximately 2.5 million deaths each year.Summarily, 4 percent of all
deaths worldwide are attributable to alcohol. Alcohol abuse, like cigarette smoking, is fatal to younger
generations as it has become the worlds leading risk factor for death among males aged 1559. The report
also confirms that alcohol consumption is estimated to cause from 20 to 50 percent of cirrhosis of the liver,
epilepsy, poisonings, road traffic accidents, violence and several types of cancer. Some of the major disease
and injury categories causally linked to alcohol are the following: neuropsychiatric disorders, gastrointestinal
diseases, cancer, injuries, cardiovascular diseases, fetal alcohol syndrome and pre-term birth complications
and diabetes mellitus.
PHILIPPINE TAX SYSTEM
Fiscal policy concerns taxation as a revenue-generating capacity of the national government. Ideally, it is
a viable solution to the many ills of society. However, when politics comes into play, taxation takes a back seat
and is seldom thought of as the optimal way to address government problems. What does reality show?
Based on the Bureau of Treasury data from year 20012011, tax revenues as a component of total
government revenues comprise a substantial proportion, ranging from 74 to 89 percent of the entire revenue
stream. There is no denying that indeed, taxes form a large part of the revenues that the national government
uses as the source of budget for its programs. Knowing this fact, one can say that taxes can save the country
from the larger-than-expected budget deficits.

Are Sin Taxes Sinful? A Policy Paper on Philippine Sin Taxes

February 2012

The next question to ask is: Which tax measure must be reformed? There are four major categories of
taxes: income and profit, sales and licenses, excise and others, which include residual domestic and travel
taxes. Illustrated in the chart is the breakdown of tax revenues into its several groups, with income as the
largest source of revenue and excise as the smallest, not considering the aggregate figure (Others). Drawing
from this graph, excise taxes prove to be a viable source of opportunity from which the government can extract
more revenue in closing the budget gap.

Inspecting the facts more closely yields a peculiar trend for the excise tax. Comparing it to the other tax
classes, it is the only tax that did not experience real and significant growth from year 2000 to 2011. Income
taxes experienced a more than two-fold increase, while sales and licenses tax enjoyed slightly less than 200
percent rise. Even the Others component, an aggregate of travel and other domestic taxes, saw a doubling in
less than a decade.

Are Sin Taxes Sinful? A Policy Paper on Philippine Sin Taxes

February 2012

Strangely (but perhaps not surprisingly), excise taxes remained constant for the years under study, and
even decreased nominally. If real rates were incorporated into the equation, the decrease would be more
magnified to prove that this form of taxes has been immutable and somewhat unchanged across ten years.
Given all these facts, there is no doubt that change is needed and must be done at the soonest. The
focal problem emerges: What changes must be applied to the current excise tax system? Before tackling this
predicament, a briefer on sin taxes is necessary.
WHAT ARE EXCISE AND SIN TAXES?
Excise taxesas opposed to general taxesare selective in coverage and discriminating in intent.
According to Cnossen, most excises in practice are more easily administered than other taxes. Excise duties
on tobacco and alcohol are potential revenue sources, because of high sales volume and few producers, and
these make collection simple. Also, due to the presence of few substitutes, consumption and revenue remain
high despite excise-induced price rises.
Sumptuary in nature, sin taxes are specifically levied on certain generally socially proscribed goods,
usually alcohol and tobacco. Other levied goods and services include gambling, prostitution, soda and more.
The relationship between both taxes is that sin taxes pertain to excise taxes on particular immoral behaviors
or vices as judged by the society. Governments impose this type of tax in order to discourage individuals from
partaking in such activities without necessarily making them illegal. For purposes of this paper, the scope is
limited to alcohol (liquor, wine and distilled spirits) and tobacco (cigar and cigarettes) products.
THE RATIONALE: IS IT A SIN TO TAX SINS?
Taxing sins, that is, taxing both alcoholic beverages and cigarettes has always made economic and
scientific sense (though not so much politically in the Philippines). Supporters have touted imposing sin taxes
as a win-win scenario, much like the idea behind hitting two birds with one stone. The firstand perhaps
the more unambiguous of the twois the health claim that sins must be punished in order for them to be
avoided by sinners-to-be and stopped by the already-sinners. Smoking cigarettes and drinking alcohol have
been proven scientifically and believed universally to be harmful to ones health. Studies have, time and again,
corroborated such belief. However, the second prongthat pertaining to the economic perspectivehas
received more contrasting (but not necessarily cogent) views. Both smoking and drinking have proven to be
behaviors producing negative externalities. And in economics, negative externalities lead to less than optimal
outcomes: overproduction of the goods involved (cigarettes and alcohol). Hence the need for Pigouvian taxes
to limit these activities while being able to earn revenue for the government. Simply put, the rationale for taxing
sin arises from its health benefitsand economic advantages.
PHILIPPINE SIN TAX SYSTEM
According to the 1997 Philippine tax code, excise taxes apply to goods manufactured or produced in
the Philippines for domestic sales or consumption or for any other disposition and to things imported. The
information listed on the following tables is obtained from RA 9334: An Act Increasing the Excise Tax Rates
Imposed on Alcohol and Tobacco Products, Amending for the Purpose Sections 131, 141, 142, 143, 144, 145
and 288 of the National Internal Revenue Code of 1997, As Amended.Chapter III, Excise Tax on Alcohol
Products, discusses tax laws on distilled spirits, wines and fermented liquor. Succeeding are tables of
summarized provisions on alcohol and cigarette duties.

Are Sin Taxes Sinful? A Policy Paper on Philippine Sin Taxes

February 2012

TABLE 3: ALCOHOL TAX CODE, 1997 AND 2004

Product
1997 Tax Code
Distilled Spirits
1. Produced from nipa, coconut, P8.00 per proof liter; P4.00 per proof
cassava, camote, buri palm, liter if not >100 liters a day, containing
juice, syrup or sugar of the cane
not more than 50% alcohol
2. If not produced from raw materials
enumerated above

2004 Revision
P11.65

Based on net retail price per 750ml

bottle:
<P250 P75
P250-P675 P150
>P675 P300

P126
P252
P504

Based on net retail price per bottle

<P500 P100
>P500 P300

P145.60
P436.80

2. Still wines containing 14% alcohol

or less

P12

P17.47

3. Still wines
alcohol

P24

P34.94

Similar to distilled spirits

Same

Based on net retail price per volume

liter
<P14.50 P6.15
P14.50-P22 P9.15
>P22 P12.15

P8.27
P12.30
P16.33

Wine
1. Sparkling wines/champagnes

containing

14-25%

4. Still wines >25% alcohol

Fermented Liquor
1. Beer, lager beer, ale, porter and
other fermented liquors except
tuba, basi, tapuy and similar
domestic fermented liquors

TABLE 4: TOBACCO TAX CODE, 1997 AND 2004

Product
1997 Tax Code
2004 Revision
Tobacco
1. Twisted by hand or reduced P0.75 per kilogram
P1.00
into
a
condition
for
consumption other than
drying
and
curing;
Prepared with or without
use
of
machine
or
instruments or not pressed;
Fine-cut shorts and refuse,
scraps, clippings, cuttings,
stems and sweepings; For
chewing so as to be
unsuitable for use in any
other manner
2. If not produced from raw
materials
enumerated
above

P0.60 per kilogram

P0.79

Are Sin Taxes Sinful? A Policy Paper on Philippine Sin Taxes

Cigars and Cigarettes

1. Cigars

P1.00 per cigar

February 2012

Ad valorem
Based on net retail price:
<P500 10%
>P500 15%

2. Cigarettes packed by hand

P0.40 per pack

P2.00 (2005), P2.23 (2007)

P2.47 (2009), P2.72 (2011)

3. Cigarettes
machine

Based on net retail price

<P5.00 P1.00
P5.00-P6.50 P5.00
P6.50-P10.00 8.00
>P10.00 P12.00

(2005) (2007) (2009) (2011)

P2.00, P2.23, P2.47, P2.72
P6.35, P6.74, P7.14, P7.56
P10.35, P10.88, P11.43, P12
P25, P26.06, P27.16, P28.30

packed

by

After reviewing the tax code on excise taxes for alcohol and tobacco, several points merit closer
attention. First, the current system is a mix of mostly specific and partly ad valorem taxation, i.e. specific for
distilled spirits, wine, fermented liquor, tobacco and cigarettes and ad valorem for cigars. In addition,
complexities arise as a result of the four- or multi-tier system dependent on the net retail price of the product.
Also, the price from which the classifications are made is based on 1997 levels. It is important to note that the
same rates are applied for both domestic and foreign products. Moreover, tax increases generally stop in the
year 2011 for those with specific taxation. After the revision of the code, excise taxes are already applicable to
the countrys ports and free zones. Crucial to the survival of the companies, there is a preferential treatment for
brands existing as of October 1, 1996 and new brands are hindered from competing as a result of more
stringent measures on price classification. Lastly, the revision is designed in a static manner such that it cannot
adjust flexibly with the times.
Aside from looking at its characteristics, what should warrant some examination are the results of the
status quo. That is, the structure of the current tax system must also be judged based on the amount of
revenues it generates for the government. The succeeding chart shows the excise tax collected from year 2001
to 2011.

Are Sin Taxes Sinful? A Policy Paper on Philippine Sin Taxes

February 2012

After the restructured tax system was implemented, it was expected to generate incremental revenues of
2224 billion pesos in its first year, doubling to 4547 billion pesos on the second year and about 5255 billion
pesos for the third year. This is according to the former Secretary of FinanceMargaritoTeves, who believed at
that time that imposing new excise tax laws would help the country in decreasing the budget deficit.
However, this ideal scenario did not happen. The shocking truth is that in 2007, two years into the new
excise tax law, sin tax collections actually fell nine percent in the first half despite higher rates. Data from the
Department of Finance (DOF) showed that tobacco and alcohol taxes reached 19.8 billion pesos from January
to June, which is two billion lower than the same period in the previous year. Given that the tax rates increase
eight percent biannually, the prospective increase in 2007 led to the local manufacturers front-loading their
withdrawals from warehouses to take advantage of lower rates.
Apart from these, other reasons for a low sin tax collection include under-reporting of sales and data
manipulation by the manufacturers. Moreover, the government, through the Bureau of Internal Revenue (BIR),
was inefficient in tax collection, as evidenced by the lower actual figures versus target revenues. In summary,
the following chart shows the problem in the relevant policy area, as well as reasons why current policy is
inadequate in solving the main issue.

Problem: Tax Structure not supporting Growth !

Problem & Solution: Excise Tax Law Revision of 2004 (RA 9334)!
Solution!

Factors!

Factors!

Multi-tiered system (too complex to administer)!

No automatic tax rate adjustment for inflation!
Favors "old brands" (hard to reclassify these)!
Low rate (total excise taxes did not increase in 10 years)!
Open to abuses (gives discretion to tax authorities)!

SIN TAX SYSTEM IN OTHER COUNTRIES

If local producers and manufacturers of tobacco and alcohol products were given the chance to relocate
to other states, they would not. The reason is that the Philippines is a conducive business environment for sin
productsas evidenced by its superlatively low rate of excise taxes, the lowest in the neighboring ASEAN
region. In fact, Finance Undersecretary Gil Beltran claimed that the Philippines sin tax rate is the lowest in the
world.
There is no one excise tax rate prevailing in the above-mentioned regions because it is common to
discuss the structure according to two categories: alcohol and tobacco taxes. However, Beltran said that the
average sin tax rate in the region is 51 percent while the countrys rate is only 28 percent. The undersecretary
also added that ASEAN countries like Thailand and Vietnam are implementing rates of 80 percent and 65
percent, respectively. The table below shows the varying rates imposed upon alcohol and tobacco products in
several neighboring Asian states. Moreover, below is a comparison of various excise (sin) tax systems across
the ASEAN region.

Are Sin Taxes Sinful? A Policy Paper on Philippine Sin Taxes

Country
Singapore

Hong Kong

Malaysia

Indonesia

Vietnam

Korea

Taiwan

China
India

Cambodia
Thailand

February 2012

TABLE 5: TOBACCO AND ALCOHOL TAXES IN NEIGHBORING COUNTRIES

Tobacco Tax
Alcohol Tax
SGD 352/000
Beer $3.10/liter
Wine $9.50-70.00/liter
Brandy, Whisky, Rum, Gin,
Vodka $30.00-70.00/liter
HKD 804
Liquor (>30% alc) 100%
Liquor (<30% alc) 40%
Wine 80%
MYR 120/000 + 20% of (ex-factory price + import Beer 89 RM/ liter
duty)
Wine 112-425 RM/liter
Brandy, Whisky, Rum, Gin,
Vodka 553-587 RM/liter
Hand rolled kreteks:
Wine 170%
>2 bio; Rate 22% of banderole
Brandy, Whisky, Rum, Gin,
>0.5 - 2.0 bio; Rate 16% of banderole
Vodka 170%
0.5 bio; Rate 8% of banderole
6 bio; Rate 4% of banderole
Machine made kreteks and White:
>2 bio; Rate 40% of banderole
>0.5 - 2 bio; Rate 36% of banderole
0.5 bio; Rate 26% of banderole
Calculation domestic:55% of ex-factory price
Beer 150%
Calculation imports:55% of [90% of (Selling price Wine 150%
of foreign branch office/(1 + 55%))]
Brandy, Whisky, Rum, Gin,
Vodka 150%
RRSP/pack > 200 = KRW 32,050/000
Beer 30%
RRSP/pack < 200 = KRW 2,000/000
Wine 15-30%
Brandy, Whisky, Rum, Gin,
Vodka 15-30%
TWD 590/000
Beer 50%
Wine 50%
Brandy, Whisky, Rum, Gin,
Vodka 50%
CIF RMB 50/carton = 45% + RMB 3/000
Yam-based 20%+RMB1/kg
CIF < RMB 50/carton = 30% + RMB 3/000
Other alcohol 10%
Filter: >85 mm; Tax = INR 2,060/000
India Made Foreign Liquor
75-85 mm; Tax = INR 1,675/000
200% or 100.4 INR/LPA
70-75 mm; Tax = INR 1,260/000
70 mm; Tax = INR 780/000
Country
Liquor

120
Non-Filter: >60-70 mm; Tax = INR 520/000
INR/LPA
60 mm; Tax = INR 160/000
*Rates will increase 5 percent on April 1, 2007
Local and Imported: 10%
All: 10%
Calculation domestic:
Beer 60%
(Ex-factory price) x (79% / (100% - 79%))
Wine 60%
Calculation imports:
Brandy, Whisky, Rum, Gin,
(CIF + Import Duty) x (79% / (100% - 79%))
Vodka 60%

Are Sin Taxes Sinful? A Policy Paper on Philippine Sin Taxes

February 2012

TABLE 6: TAX FORMS IN NEIGHBORING COUNTRIES

Tax Structure
AVT, Specific or Mixed
Philippines
Mixed
Laos
Single AVT
Myanmar
Single AVT
Cambodia
Varied AVT
Vietnam
Varied AVT
Indonesia
Varied AVT
Singapore
Single specific
Malaysia
Single specific (tobacco)
Mixed (alcohol)
Brunei
Single specific
Thailand
Mixed

Apart from the obvious fact that the Philippines has one of the lowest rates in the region, it must also be
emphasized that different states have varying excise tax structures for diverse reasons. Within the Asia Pacific
region, 19 of the 27 countries impose specific excises on cigarettes. This further corroborates the trend, over
the period of 19862006, toward specific taxes for tobacco products. Explaining such a phenomenon is the
opening up of various countries cigar markets to investors and competitors.

Among those countries that impose a specific tax on tobacco products, a sample of 14 states was studied,
including the Philippines and its ASEAN neighbors. The previous chart illustrates the specific duty collected (in
US$) per 1000 cigarettes. Needless to say, the Philippines is lagging behind in terms of the amount of tobacco
tax being collected. To put it in extreme terms, its tobacco tax collection is only one percent of the cigarette tax
accumulated in Singapore.
BENEFITS OF SIN TAXES
There are various benefits in imposing a sin tax on alcohol and tobacco products. On top of the list is
revenue generation, the primary reason for implementing any tax measure. In times of budget deficit or growth
slowdown, the much-needed funds can be sourced from sin taxes to pump prime the economy. The question
now is how much funds can such sin taxes generate? An example of best practices in sin tax hikes is Thailand,

Are Sin Taxes Sinful? A Policy Paper on Philippine Sin Taxes

February 2012

where the estimated accumulated revenue from sin taxes in 12 years was able to finance the construction of
the Bangkok Mass Transit system. In the Philippines, these tax collections can amount to as much as 65
billion pesos per year, which can be used to construct hospitals, hire more medical officers and expand
coverage of the health insurance program.
Apart from this chief objective of revenue generation, sin taxes also exist to cause possible behavior
modification. Studies have shown that an increase in tobacco and alcohol prices leads to decreased use of
such products. In fact, taxing sin products is seen to be the most potent tobacco control policy (as against
other examples like graphic health warnings, etc.). Since researchers and economists have proven price to be
an effective deterrent for young and poor people, a price increase due to the tax hike will lead them to lessen
consumption. Moreover, price is readily implemented and relatively well-enforced vis--vis other regulations
that need strict monitoring from the government (e.g. minimum age requirement). In the long run, the outcome
will be less government expenditure for tobacco- and alcohol-related diseases. Further strengthening this claim
is the substantial healthcare expenditures spent on the four major diseaseslung cancer, heart attacks, stroke
and chronic obstructive lung diseaseswhich amounted to Php276 billion in 2005.
Because of this, sin taxes also help in internalizing the effects of negative externalities in smoking and
drinking. Common examples are the effects of secondhand smoke to bystanders and the potential dangers of
drunk driving. The externality claim is intended to make the sinners responsible for the social effects of their
private action.
However, even if with stringent tax measures, the government is unable to completely deter individuals
from engaging in such vices as a result of their inelastic demand, it still appears to be a win-win situation. On
the one hand, the government benefits through the revenues it earns from the people. On the other, it is able to
discourage socially proscribed activities (even if it may be at the expense of collecting less revenue). The winwin situation is characterized by the dual objectives of imposing a sin tax: first, the revenue goal of collecting
more money for government spending (whether earmarked or not) and second, the health target of dissuading
individuals, especially the young and poor, from smoking to mitigate health risks.
The World Health Organization (WHO) in 1999 approximated that about 200,000 Filipino men would
develop smoking-related diseases in their productive years of age. It was also estimated that the cost of
providing healthcare for these sick persons, including the loss in productivity, would cost Filipino taxpayers
some Php 43 billion. According to the more recent Tobacco and Poverty Study (2006), economic costs, which
include health care costs and productivity losses from death and disease related to four smoking-related
diseases in 2003 (lung cancer, cerebro-vascular disease, coronary artery disease and chronic obstructive
pulmonary disease [COPD]), would range from US$ 2.86 to 6.05 billion or Php 148.47 314.38 billion yearly
(US$1=Php 52 in 2003).
TABLE 7: SUMMARY OF ECONOMIC BURDEN FOR FOUR SMOKING-RELATED DISEASES, 2003
Method of Estimation
Peto-Lopez (PhP)
SAMMEC (PhP)
Lung Cancer
3,955,887,312
10,519,912,468
Cerebro-Vascular Disease
49,993,712,496
180,791,465,452
Coronary Artery Disease
65,911,644,968
85,209,679,672
Chronic Obstructive Pulmonary Disease
28,607,506,096
37,863,055,984
Current Smokeless Tobacco Users
2.0
2.8
Daily Smokeless Tobacco Users
1.4
1.8
Source: Tobacco and Poverty in the Philippines

Are Sin Taxes Sinful? A Policy Paper on Philippine Sin Taxes

February 2012

The Tobacco and Poverty Study estimated that smoking related illnesses, namely, lung cancer, cerebrovascular diseases (CVD), coronary artery diseases (CAD) and chronic obstructive pulmonary diseases (COPD)
accounted for 68 percent of total deaths and has cost us the amount of US$2.866.05 billion.
TABLE 8: SUMMARY OF ECONOMIC COSTS IN US$ FOR FOUR SMOKING-RELATED DISEASES, 2003
(USING SAMMEC METHODOLOGY FIGURES)
Productivity
Productivity
Health Care
Smoking-related Diseases
Losses from
Losses from Total Costs
Costs
Death
Disease
Lung Cancer
9,188,871
189,709,987
3,407,151
202,306,009
CVD
507,315,052
2,930,533,343
38,910,556
3,476,758,951
CAD
236,888,476
1,312,836,695
88,922,515
1,638,647,686
COPD
104,561,119
569,530,925
54,043,648
728,135,692
All 4 Diseases
857,953,518
5,002,610,950
185,283,871
6,045,848,339
*$1=PhP 52. Source: DOH et al. (2006).

An extended benefit of the revenue objective is the eventual fruition of the universal health care program.
Fruition, in the sense that up until now, the universal health care is still not universalas it covers only 53
percent of the population, a fact openly recognized by the DOH. Of these, only 42 percent have availed
themselves of the services with merely 34 percent support value for a total benefit delivery ratio of eight
percent.
Given the Aquino administrations widespread support for the KalusuganPangkalahatan program, it is
imperative for the government to allocate resources for the success of this initiative. This follows from the fact
that one of the significant obstacles to attaining universal health care is the lack of financial resources directed
towards the stated health agenda.
Ultimately, sin taxes are widely supported by the general population. According to a nationwide survey,
about 80 percent of the population including smokers and drinkers is agreeable to the imposition of excise
taxes on their vices. Due to the support this particular tax garners, it should ideally be easier for politicians to
decide on the aforesaid measures.
COSTS OF SIN TAXES
There is no such thing in economics that does not incur any cost. As with any tax measure, sin taxes
likewise have costs attached to them. Politicians against excise taxes, as well as tobacco and alcohol
companies, always use the argument of unemployment and the possible decline of the industry. There are
assertions that an increase in prices as a result of the tax hike will be borne by both producers and consumers,
endangering the survival (or profitability) of such business entities. Aside from these, well-meaning politicians
claim that sin taxes are by their inherent nature regressivehence, they damage the poor more than the
affluent. Empirical data have proven that sin taxes generally affect the low- and middle-income earners who
patronize these sin products.
Another natural result ensuing from the tax hikes is the creation of black markets or the incidence of
smuggling. Being addicted to these goods, consumers who cannot afford the higher price of cigarettes and
alcohol look to other (often illegal) sources. Another related effect would be the consumption of higher-intensity
goods (higher tar or alcohol content), which is counterproductive in that it leads people to consume more
harmful products in the process.

Are Sin Taxes Sinful? A Policy Paper on Philippine Sin Taxes

February 2012

Equally as controversial is the contention that, as with any other good or activity, every individual has the
freedom to choose for himself. The dispute of personal choice or more commonly known as individual
sovereignty can be thought of as an offshoot from the popular adage: To each his own (poison). In fact,
opponents of the sin tax claim, smoking is pleasurable as in many other things. Instead of sin products, these
products should be called pleasurable products. Indeed, smoking can be seen as just another activity that
people enjoy doing, and just like any other activity, people are free to do it as they please.
COST-BENEFIT ANALYSIS OF SIN TAXES
Analyzing both costs and benefits is crucial in deciding whether or not sin taxes are indeed
advantageous to society. One argument is that smokers and drinkers actually save the government from
spending more for healthcare since they are assumed to have shorter life expectancies. However, such an
argument must be questionedalthough these people may have shorter years, they may actually spend more
for treatment costs. There is no telling as to which is more costly: a longer life expectancy or a shorter one with
higher morbidity costs.Despite the claim that sin taxes are regressive, there is something that can be done to
lessen their adverse effects on the poor. If the tax hike is significant enough, it can deter the poor from actually
purchasing the good. This may result in less healthcare costs and a more productive workforce. The question
ofregressivity also deserves a second look. Cnossen echoes Gruber and Kszegibyforwarding an argument
that changes the perspective on the burden distribution of the traditional excise duties:
Tobacco taxes, for instance, have often been vilified for falling much more heavily on the poor than on the rich. But in Gruber and
Kszegis view the goal of tax incidence is not only to measure who pays more of the tax, but rather who is hurt most by it. Those who
are hurt most by the tax are also those who are most price sensitive to tobacco, meaning that their self-control value of taxation is larger.
By this reasoning they find that tobacco taxes may actually be progressive. And much the same reasoning applies to alcohol taxes.

Although lost jobs are valid as an argument, there is a way to solve this short-term problem. Since taxes
generate revenue, the government may allocate some of these to help the laborers affected by the change in
the tax system. In fact, it has been shown that tobacco farmers would gain more by changing employment (i.e.
shifting to alternative crops). However, the industry claim that sin taxes can hurt the economy is purely
unfounded. By analyzing the labor data, one can observe that the share of tobacco farming, manufacturing,
wholesale, and retail sectors in total employment in the Philippines is less than one percent.In fact, there has
been a decreasing trend for the share of tobacco employment to total employment over time.

Are Sin Taxes Sinful? A Policy Paper on Philippine Sin Taxes

February 2012

Smuggling is a real outcome of sin taxes; however, it is up to the government to impose efficient systems
to run after lawbreakers and offenders. However, according to Euromonitor, the illicit tobacco trade in the
Philippines is relatively low compared with other countries, as the Philippines maintains some of the lowest
cigarette unit prices anywhere in the world. The smuggling of locally produced cigarettes to other countries is
possible due to the low unit prices of cigarettes and comparatively low excise taxes in the Philippines.
However, the quantity of cigarettes illegally brought out of the Philippines is estimated to be insignificant.
Smoking, indeed, is like any other activity that is within the personal choice of every individual. However,
as with any other activity, ones personal choice (especially in smoking and drinking) has a social dimension to
it. In this case, smoking or drinking is never in isolation; as a matter of fact, these activities frequently have
effects on persons other than the individual.
Sin taxes are also a case of a win-win scenario. In the first instance, government, in raising taxes, earns
more revenue to fund its programs and balance its budget. However, if this does not happen, it means that the
taxes are so great as to dissuade people from committing their vices. The ideal scenario is when optimal taxes
are imposed: government raises taxes enough to earn revenues and simultaneously deter people (especially
low-income earners) from engaging in those activities. However, a question remains unanswered. Why is it that
sin tax reforms continue to be elusive despite being more socially beneficial? Here is where politics, and not
economics, reigns supreme. Economics dictates that sin taxes are marginally more beneficial to society
(perhaps a reflection of why it is popular to most people). However, politics plays a bigger role in that larger
corporations (specifically Philip Morris Fortune Tobacco Corporation) can lobby their stands more efficiently
than individuals because there is no one group that unites all these people. There are different groups vis--vis
the bigger business entities that appear to have greater lobbying power over the politicians (said to repay their
debt to the businessmen who funded their campaigns).
The cost-benefit analysis is not absolute; that is, it really depends on how the observer or analyst
weighs each cost and benefit. For the author, there is a net benefit to sin taxes, especially when social costs
and benefits are taken into consideration. Following are the policy recommendations, but before those, the
elements of an efficient tax system.
ELEMENTS OF AN EFFICIENT TAX SYSTEM
Economic
Efficiency!

Administrative
Simplicity!

not
distortionary!
enhance
efficiency!

low costs of
administration
and
compliance!
easy to
understand!

Flexibility!
allow easy
adaptation to
changes in
conditions!

Political
Responsibility!
should be
transparent!
consultative!

Fairness and
Social Justice!
equitable
distribution!
same
products,
same tax!

POLICY RECOMMENDATION
After a rigorous discussion of what sin taxes are, what they are for, sin tax systems in the Philippines and
its neighboring countries, as well as costs and benefits of the tax structure, it is but fitting to arrive at a
recommendation of the policy reform that must take place given all the preceding analyses.

Are Sin Taxes Sinful? A Policy Paper on Philippine Sin Taxes

February 2012

We propose a revised sin tax law, with a higher rate, a completely specific form and a uniform tax rate
for all tobacco and alcohol products. Although an exact figure cannot be proposed, the general idea is that it
must be raised in order to be at par or closer to its ASEAN neighbors. More studies must be made to determine
the optimal sin tax rate. Aside from this, revenue generated from the increased tax collections must be
allocated mostly to healthcare programs, especially now that the incumbent administration promises universal
healthcare for every Filipino. The subsequent table explains how we arrived at our recommendations using the
essential elements of an efficient tax system as the main decision criteria. Subjective ratings were used to
compare the present and proposed tax laws across each area of consideration.

Criteria

Economic
Efficiency

Administrative
Simplicity

Flexibility

Political
Responsibility

Fairness and
Social Justice

TABLE 9: COMPARISON OF PRESENT AND PROPOSED SIN TAX LAW

Present Sin Tax Law:
Proposed Sin Tax Law:
Low rate
High rate
Mix of specific and Ad valorem
Specific with indexation
Multi-tiered system
Uniform tax rate
The advantage of low rate taxation is the The higher rate is imposed in hopes of
presence of smaller deadweight loss. internalizing the externality present in such
However, this might not be efficient in that activities.Uniform tax rates also increase
economies of scale are not maximized.
efficiency by discouraging smuggling.
Despite being specific, the biannual In addition to the simplicity of specific taxes,
changes are in essence like ad valorem having a uniform rate makes collection easier
because of constant change. Aggravating for all types of products.
this is the multi-tiered system for different
types of products, for varying level of
prices.
Specific taxation inherently is fixed or sticky Although an ad valorem tax rate is
and is easily eroded by inflation. More inherentlymore flexible, a specific rate with
pronounced
for
countries
like
the indexation for inflation can do the job. When
Philippines, tax reforms are hard to initiate the right rate is set, there is no need for
and hence, the importance of a flexible rate constant reform of the tax code, only
is emphasized.
adjustments made via the inflation index.
The presence of a multi-tiered system Given that a uniform tax rate is used, there is
bestows power on tax authorities to classify no room for manipulation. A uniform tax rate
brands accordingly. Thus, this is open to must be applied to products, regardless of
abuse and manipulation, just as the current whether they are old or new. This prohibits
system is favoring old brands over new tax authorities from using their influence to
ones, discouraging competition.
control the law.
With the multi-tiered system, there is an With a specific tax for all products, there is
attempt to classify brands according to no favoring of old versus new brands.
price and charge a premium on high-priced Moreover, although sin taxes are said to be
goods. However, this is defeated by the regressive, the revenues collected can be
misclassification of brands.
used to make the whole system benefit those
in need.

PROPOSED SIN TAX BILLS

Public interest dictates that priority be given to restructuring the current tax system to remedy the myriad
problems associated with it. The achievement of health and health objectives will be more attainable if the
reforms to be effected include the removal of the price classification freeze, indexation of taxes to inflation,
shifting to a unitary tax system, and increases in the tax rate that significantly increase cigarette prices. The
succeeding table shows the revenue impact estimate of all the sin tax bills currently filed.

Are Sin Taxes Sinful? A Policy Paper on Philippine Sin Taxes

TABLE 10: SUMMARY OF ESTIMATES OF INCREMENTAL REVENUE IMPACT (LOCAL)

(in billion pesos)
2012
2013
2014
2015
2016
Cong. Mandanas
44.24
Cong. Suarez
38.47
Cong. Aumentado
11.01
Cong. Limkaichong, Teves, Arnaiz 19.35
24.38
Cong. Abad
58.54
72.43
65.55
Cong. Javier
0.54
(1.17)
(3.8)
Cong. Singson
(1.36)
(3.67)
Source: DOF Presentation at the Ways and Means Committee Hearing, March 21, 2011

February 2012

2017

(6.64)

There are seven sin tax bills being deliberated by the House Ways and Means Committee of the 15th
Congress. House Bill 3465 filed by Batanes Representative Henedina Abad; House Bill 2687 filed by
Representatives Jocelyn Limkaichong, George Arnaiz and Pryde Henry Teves; House Bills 2485 filed by
Representative Erico B. Aumentado; House Bill 3183 filed by Representative Danilo Suarez; House Bill 3487
filed by Representative Neil Tupas; House Bill 3666 filed by Representative Paolo Javier; and House Bill 3059
filed by the (former as 2/14/12) committee chairman HermilandoMandanas.
Among them, three are endorsed by the DOF and DOH, specifically, HB 3465 filed by Rep. Abad, HB
3489 filed by Rep. Tupas and HB 2687 filed by Reps. Teves, Arnaiz and Limkaichong. This is understandably
so as these bills are the most comprehensive in that they propose the complete set of tax reforms needed to
reduce tobacco consumption effectively and raise the most significant amount of revenues for the government.
The said bills are compared in the following table.
TABLE 11: EXCISE TAX INCREASE PROPOSALS ENDORSED BY DOF AND DOH
Proposed Tax Reforms
Proposed %
Proposed
Indexation
Price
Uniform
Change in
Year of
Classification
Tax
Excise Tax
Implementation
Freeze
Structure
HB 3465 (Abad)
Uses overall

215
2012
HB 3489 (Tupas)
CPI as basis
HB 2687 (Teves,
Uses index
Limkaichong, Arnaiz)
for tobacco

81
2011
products as
basis

The DOF estimates that the adoption of HB 3465, HB 3489 and HB 2687 will result in at least Php
58.54 billion, Php 58 billion and Php 19.35 billion in incremental revenues for the first year of implementation
alone. The passage of any one of these bills will enable the government to meet both short-term and long-term
health objectives. If a tobacco tax measure is implemented, smoking prevalence is projected to be reduced by
at least five percent in the first year, which is twice greater than at least 2.5 percent per year beginning 2011.
According to Sta. Ana and Latuja, HB 3465 and HB 3489 are projected to make the most impact in
terms of number lives saved, reduction in smoking prevalence and additional excise tax revenue. In the
simulation for tobacco tax impact of the reform bills in the study, it was shown that the 215 percent increase in
cigarette excise tax under HB 3465 and HB 3489 would result in the reduction of smoking prevalence to 23
percent from 2010 levels of 28 percent. An increase of 81 percent in excise tax under HB 2687, on the other
hand, would result in the reduction of prevalence rates to 25 percent.

Are Sin Taxes Sinful? A Policy Paper on Philippine Sin Taxes

February 2012

Estimates also show that 1,130 lives would be saved with the adoption of HB 3465 and HB 3489 and
would bolster the financing of health initiatives by the collection of an additional Php 26 billion of excise tax
revenues at the least, in the first year alone. The table below summarizes the impact of the respective excise
tax increase proposals.
TABLE 12: IMPACT OF THE EXCISE TAX INCREASE PROPOSALS
2010 Levels
Future Values
House Bill
HB 3465 & HB 3489
HB 2687
% Increase in Excise Tax
215%
81%
Average Retail Price Per Pack (PHP)
19.27
33.38
24.59
Average Total Tax Per Pack (PHP)
7.92
22.04
13.24
Tax as % of Retail Price
41.1%
66.0%
53.9%
% Increase in Retail Price
73.2%
27.6%
Reduction in Number of Smokers (thousands)
-0.235
870
390
-0.87
3,230
1,460
Number of Lives Saved (thousands)
-0.235
310
140
-0.87
1,130
510
Total Number of Smokers (thousands)
-0.235
17,300
16,430
16,910
-0.87
14,070
15,840
Smoking Prevalence
-0.235
28.3%
26.9%
27.7%
-0.87
23.0%
25.9%
% Change in Smoking Prevalence
-0.235
-5.0%
-2.3%
-0.87
-18.7%
-8.4%
Additional Excise Revenue (PHP million)
-0.235
48,196
19,252
-0.87
26,008
12,604
% Change in Excise Revenue
-0.235
177.7%
71.0%
-0.87
95.9%
46.5%
Total Cigarette Tax Revenue (PHP million)
-0.235
36,683
89,916
57,897
-0.87
63,429
49,598
% Change in Tax Revenue
-0.235
145.1%
57.8%
-0.87
72.9%
35.2%
% Change in Industry Revenue
-0.235
-11.9%
-5.5%
-0.87
-37.8%
-19.1%
Source: Cigarette Affordability and the Impact of Tobacco Taxation on Health and Revenues (2011)

OBJECTIONS TO POLICY REFORM

As regards the proposed policy reform, two major objections can be made against such
recommendation. First, the issue of form, ad valorem versus specific taxation, may be raised. Second, the high
tax rate is argued to be unconscionable by affected industries and workers. Despite each objection having its
own merit, we will attempt a defense of the proposed policy change, thus rendering such concerns invalid.

Are Sin Taxes Sinful? A Policy Paper on Philippine Sin Taxes

February 2012

Although specific taxation is said to be more easily administered because of a fixed amount, in the
Philippine setting, such simplicity is not taken advantage of. Adding to the specific taxation is the multi-tiered
system and the biannual change in taxes that actually contribute to the complexity of the tax structure. Another
case against specific taxation is its fixed rateand as a result, making changes is difficult and remains
contingent on the approval of Congress. Hence, in the Philippines case, specific taxation by itself is not
sufficient. It needs to be complemented by indexation.
Indexing to inflation will dispel the need for any multi-tier system that only authorizes tax officials to
classify brands according to tiers (which is open to corruption and abuse). Moreover, the steady, biannual
increases in taxes will no longer be needed provided that indexation adjusts according to the price. As a
corollary, it is able to modify its rate without being eroded by inflation.
The second argument in support ofindexation is that there is no need to constantly change the rate
structure. Specifically for the Philippines, it is significantly advantageous because passing a new bill or revision
to a current bill takes a tremendous amount of time, effort and eventually, cost. Thus, in states with rigid
institutions such as the legal system, a flexible tax rate will prove to be beneficial.
On the whole, as seen in the trend towards specific taxation, the Philippines must review its current
structure based on two considerations: first, indexation is better adjusted to the times; second, there is no need
for constant revisions (especially for legislative systems that are rigid like in the Philippines).
TABLE 13: CHANGES IN TAX FORMS
Prior System
New System
Mixed weight-based specific and ad
Specificunit based if 0.8kg/000;
valorem
weight based if > 0.8kg/000
India
Ad valorembased on retail price
Specific length based structure
Japan
Mixed specific and ad valorem
Specificunit based
Korea
Ad valorembased on CIF price
Specificunit based
Maldives
Ad valorembased on CIF price
Specificunit based
New Zealand
???
Specificunit based if 0.8kg/000;
weight based if > 0.8kg/000
3
Philippines
Ad valorembased on ex-factory price
Specificbased on price bands
Taiwan
Ad valorembased on CIF price
Specificunit based
Table obtained from Emil SunleysTobacco Excise Taxation in Asia: Recent Trends and Developments
Country
2
Australia

Year of Switch
1999
1997
1989
1988
2000
???
1997
1987

Perhaps the more controversial issue is the proposed tax rate hike. Again, there is no exact rate
suggested yet as this requires more comprehensive studies on optimal taxation. The new rate must strike a
balance between earning revenues for the government while deterring people (especially the impoverished)
from engaging in such behaviors. What is most problematic about a tax rate hike is the probable massive
decline of the industry as well as the possible unemployment resulting from it.
First, the very lucrative and immensely profitable tobacco and alcohol industries will not experience great
deterioration as a result of the tax hike. There is no denying that taxing normal goods will affect the price and
therefore, quantity demanded by consumers. However, tobacco and alcohol are not exactly like other normal
goods. To their advantage, they are addictive and that implies a more inelastic demand. Another case
supporting this is that the Philippines, as verified by research, has one of the highest cigarette and liquor
consumption rates in Asia. Hence, the market is seen to grow and unlike their claims, the industry will not
significantly weaken. It will suffer (as will any industry that is taxed), but it will certainly survive.

Are Sin Taxes Sinful? A Policy Paper on Philippine Sin Taxes

February 2012

Second, the danger of rising unemployment exists. Despite its validity as an argument, there are
solutions that can serve to counter it. First, the government, through its projects, can initiate temporary job
creation for those affected by the downsizing of the industry. Complementary to this is the governments use
of a part of the collected tax revenues to support these laborers, especially the Virginia tobacco farmers.
Although initially the government may incur costs for these activities, it only proves that such an argument is
not sufficient to offset the benefits of imposing a sin tax.
DRAWBACKS OF POLICY REFORM
Ensuing from the imposition of higher tax rates is the incidence of smuggling. As economists would put it,
the higher the tax rate on sin products, the greater the benefit is for smugglers. Black markets are created as a
result of these tax hikes. Despite the validity of such arguments, there are ways to mitigate this problem. First,
the government must effectively enforce the law and punish violators with grave penalties. Second, we
suggest that the tax hike, not be exorbitantly high. The basic idea behind sin taxes is to make the consumption
of goods more expensive, not to forbid them per se. Finally, having a uniform tax rate as compared to a multitiered system, according to EU Representative Therese Yosuico, can help curb smuggling. This can also be
applied in international cases where harmonizing tax rates across countries may help in stopping black market
transactions by lessening the incentives of looking for cheaper alternatives when prices are relatively uniform.

Are Sin Taxes Sinful? A Policy Paper on Philippine Sin Taxes

February 2012

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Are Sin Taxes Sinful? A Policy Paper on Philippine Sin

Taxes

February 2012

Conclusion: Taxing Sin is No Sin At All

Last year, 2011, did not bode well for the Philippines. Up until the third quarter, it continued to
be haunted by slow growth partly caused by underspending. The country needs financing sources
in order to provide more room to spend and grow. An attractive and popular proposal is the tax hike
for sin taxes on tobacco and alcohol. Given the very low rate and flawed structure of sin taxes, it is
imperative that government review its policy, especially with the deficit. Cost-benefit analysis shows
that revamping the current system is more beneficial to society in the following respects: increased
tax revenues, possible behavior modification, limiting externalities, simplified tax structure, more
adjustability to inflation and less need for future tax reforms. Therefore, the policy recommendation
is to adopt a higher yet uniform specific tax rate with indexation. In summary, the policy paper has
illustrated the necessity of reforming the sin tax system in the Philippines, for the sustainable growth
of the country. Indeed, taxing sin is no sin at all.

When the solution is simple, God is answering.

Albert Einstein

Unit 1403 West Trade Center

132 West Aveneue, Quezon City
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aer@aer.ph