“Sin taxes” increase alcohol consumption

Grand Korçi writes: The income the Turkish state generates from special consumption taxes has now reached the bar of 10 per cent of overall tax incomes. Alcohol is expected to generate around 15 billion Turkish Liras for the state in the year 2019. But do the hikes on special consumption taxes actually lower alcohol consumption?

Grand Korçi

In the jargon of economics, taxes imposed on commodities such as alcohol, cigarettes, gambling and environment-polluting activities are dubbed “sin taxes”. States frequently resort to sin taxes to limit or lower the consumption of alcohol or other harmful goods. By implementing such taxes, states seek to encourage its citizens to give up on certain unhealthy habits that bear a high social cost. 

Sin taxes were first adopted in the US, in 1791 for cigarettes, and in 1794 for whisky. The concept of a sin tax was initially grounded in religious values but later evolved into type of tax that merely had an economic and social attribute. During the Great Depression in 1929, sin taxes were again used as a policy tool.  

At various periods during Ottoman times, sin taxes were levied on alcohol and tobacco, though under different names. Today, special consumption taxes (ÖTV) are considered as belonging to the category of sin taxes. 

The income the Turkish state generates from special consumption taxes has now reached the bar of 10 per cent of overall tax incomes. Alcohol is expected to generate around 15 billion Turkish Liras for the state in the year 2019. Given the country’s rocky economic situation, such an inflow is naturally appealing to the government. It has no intention of giving it up. Nonetheless, sin taxes have become somewhat of a public health issue. 

But do the hikes on special consumption taxes that are imposed every year in January and July actually lower alcohol consumption? Do people change their consumption frequency and preferences because of high taxation? It is difficult to tell. Data on the matter is scarce and too few academic studies have been conducted to get clear grasp on the effectiveness of such policies. Still, some figures give us a clue. 

The harmonization process for the EU

Turkey’s tax rates on alcoholic drinks in are calculated according to the European Economic Community (EEC) directive number 94/84 on the special consumption tax rates of alcohol and alcoholic drinks.

This directive has determined the tax rate in wine as zero per cent. Several criteria apply to beer. Rates are higher for alcoholic drinks that have a higher percentage of alcohol. As the alcohol rate increases, so does the tax rate. In 2009, Turkey submitted an action plan to the EU, in which it pledged to gradually lift the exclusive taxation of raki in order to catch up with the EU directive rates of 2018.

This directive enforces tax reductions of up to 50 per cent for alcoholic drinks in Greece and Italy, and for wine, liquor and raki that is made from wine. The EU is expecting Greece to comply with the directive rates in 2021. Turkey has long been diverted from the EU route. While no progress has been made in the fields of education, health, justice and human rights, in alcoholic drinks the taxation of raki has been made equal to that of whisky. This prompted a significant increase in the sales of whisky. 

Yet raki is a lot more costly than whisky. Rather than grapes and anise, whisky is made with grain. Raki should naturally be protected against whisky. What is more, it is a local and national product. Protecting raki means protecting agriculture, the farmer and industry.

In fact, efforts aimed at regulating taxes after 2011 have directly impacted consumption.  

Alcoholic drink sales

The Tobacco and Alcohol Department of Turkey’s Ministry of Agriculture and Forestry has issued the supply figures for all types of drinks to the market since 2004. When we look at the figures of the past five years, we see that beer is nearing a billion-liter range, while the purchasing of wine and whisky are steadily rising. Raki, on the other hand, is undergoing is record-low. 

While the official sales figures for raki have fallen, it is estimated that up to 10 million liters of raki made from ethyl alcohol were consumed. In other words, there has been no drop in the consumption of raki. People have found their own solutions to circumvent extreme taxation.

Upon the examination of all types of alcoholic drinks, one is struck by the steady increase in the consumption of alcoholic drinks in Turkey over the past few years. In 2018, close to 1.2 billion liters worth of alcoholic drinks were sold in Turkey. This figure is expected to increase in 2019.

If we look into the distribution of alcoholic drinks, we notice a rise in the number of importations. The leading import is whisky. While tax rates in harmony with EU legislation have increased whisky sales, they have seriously curbed raki sales. 

But how to reconcile the fact that alcohol consumption remains constant while sin taxes are rising? 

Academic research

Several academic studies have been carried out on the effectiveness of sin taxes. For instance, Ersan Özkan from Namık Kemal University in Tekirdağ examined the relationship between special consumption taxes on alcohol and tobacco products and their consumption. Here are extracts of Özkan’s research:  

“The frequency in the usage of alcoholic beverages changes according to gender, age, education and monthly income. Gender makes a difference in opting for bootleg. Gender also makes a difference in the amount of money spent for alcoholic drinks. When individuals spend high monthly amounts on alcoholic drinks, diverting to bootleg is lower, whereas when the monthly spending on alcohol is low, frequency and preference for bootleg is high. This situation is tied to the illegal production of alcohol and smuggling activities. Thus, the relationship between commercial profits in alcoholic drinks and consumption has to be examined separately. Price hikes caused by special consumption taxes on these products are used by certain segments to make illegal profits, thereby playing a significant role in the increase of underground production and smuggling activities.”

“Tax increases on alcoholic drinks and tobacco do not decrease the consumption of such products. In other words, no reducing effect has been observed regarding the increase of taxes on the consumption of alcohol and tobacco products. On the contrary, increases in taxes have a positive effect, though slightly, on the consumption of these products.”

“As a result, the special consumption taxes imposed on alcohol and tobacco products in Turkey party meets the financial aim in terms of the income generated for the state budget, but falls short of the performance expected from it as the desired economic and social benefits. It does not have a successful diagram in orienting the preferences of consumers. The result of the study is that taxing alone is not effective in the restraint of the consumption of these products accepted as harmful to public health. It also causes the formation of an illegal sector. In this context, the data points out to the necessity of social awareness activities to reduce the consumption of these products. At the same time, efforts should be exerted to eliminate the pattern where more tax leads to more unregistered economy.”

Another article published in the University of Thrace’s Social Sciences Magazine was written by Murat Çetin and again Ersan Özkan. It is entitled “A Field Study on Alcoholic Drinks Consumption: Thrace Region”. In its research summary, the paper states that 80.3 per cent of those who participated in the survey had recourse to bootleg, 16.8 per cent did occasionally, 1.9 per cent did all the time. The reasons for using bootleg were, respectively: “high prices due to new taxes”, “the taste was better”, “the fact that they were produced in other countries.”

When participants were asked “What is your consumption trend when there is an increase in the tax rates of alcoholic drinks,” those who said they would decrease their consumption corresponded to 30.3 per cent. Those who said they would totally give it up amounted to 8.7 per cent. Those who said they would opt for bootleg were 20.2 per cent and those who said they would divert to less expensive drinks were 20.2 per cent. Those who said their consumption rate and preference would not change made up 20.7 per cent of the total. Those who said that even if the prices were lowered they would not increase their consumption were 57 per cent. In another question, 84 per cent of the participants said they believed the tax system was unfair.  

In other similar studies brought about similar results. While extreme taxation makes alcoholic drinks inaccessible, it does not decrease consumption. This situation contributes to the creation of an unregistered sector. In other words, the state is putting the health of its citizens at risk with its own hands. With these high rates, the state actually loses tax income. If this goes on, the non-drinking society the government is seeking will not be achieved, but many people will face the risk of death or chronic health problems. 

In January, a new tax hike is to be adopted. In the face of these taxes reaching unbearable dimensions, instead of opting for illegal products or other solutions, we should protest and chant “Raki is our tradition and we do not accept these taxes.” The state should lend an ear to this voice and look into ways of returning to the raki’s protective tax regime. Even if no tax hikes are adopted in January, raki remains expensive. In order to lower the price of raki, there is no other way but to lower the sin tax rate.