Presentation at the Tenth Annual Eurasia Fiscal Experts’ Seminar in Viena

Dr. Michael Brauninger reviewed the results of current scientific research into tobacco tax policies, a top priority interest for regional countries. He addressed more general “constitutional” issues associated with tax policy responsibilities, both nationally and internationally.

His findings, some of which were presented graphically (e.g. see optimal tax curve for tobacco taxation) included the following:

• Consensus on the objectives justifying special taxation of tobacco products (e.g. raising tax revenues and protecting public health).

• Differences in optimal level of tax across countries according to differences in income, regulations, culture, education/risk awareness, and illicit tobacco consumption.

• No single optimal tax level for all countries. Significant country differences mean optimal tax levels could vary vastly, while international coordination and/or harmonization of tax rates made no economic sense and might have negative effects owing to countries’ vulnerability to illicit tobacco trade. Analysis of the EU showed there was no correlation between excise yields and smoking prevalence as well as tax yield.

• International consensus that sector-specific taxation should not be subject to regulation by international agreements. Any such outside prescriptive obligations were inappropriate and unacceptable, being excluded by national tax regulations.

• Tax sovereignty implied the ability to raise revenue (i.e. the right to determine tax rates and structures) and full control of fiscal policy (i.e. to determine the use of tax revenues).

• A “tobacco tax” or such “earmarking” would likely lead to non-optimal solutions since it impeded a quick adjustment to changes in costs or demand, required supplementary aid to adjust for dynamic changes in tax revenue or production cost, and removed a percentage of revenues from the general budget.

• Moreover, earmarking was incompatible with most national constitutions (e.g. as restricting Parliament’s budgetary responsibility) and tax laws, while undermining national tax sovereignty. Recognizing that, as a fact, earmarking and sectorspecific taxation were not uncommon across the regional jurisdictions, the research findings prompted reflection about their general applicability, as well as their implications, specifically both for the EEU fiscal arrangements (e.g. the  harmonization objective) and for directions in the Eurasia region countries’ own tax systems.

Taken from: ITIC Bulletin | International Tax and Investment Center | September 2014

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