Pigovian Taxes: Are We Finally Ready For It?

This past week, I met up with a senior official at MOF, and he surprised me by supporting a resumption of duty on petrol (via GST). Relief had been granted for RON95 since GST was implemented, and before that, relief from sales tax had already been in force for years.

It turns out he (and I) are not alone:

Debate on petroleum tax

Amidst the falling price of crude, a question that is being debated by some within and outside the Government is whether there should be a tax on petrol.

The current automatic pricing mechanism (APM) for determining petrol prices comprises multiple components, including product costs, operation costs, vendor margins and a tax, among others.

Notably, the current managed float system is based on monthly reviews on the APM based on prevailing crude oil prices and the margins enjoyed by petrol dealers are closely monitored by the government.

Before the APM came into place, for each litre of petrol the tax portion was 58 sen.
However because of the high oil price, the government did not collect the tax and instead subsidised petrol to keep prices low.

Now the question being asked is whether the Government should reduce its relief on RON97 since petrol is a consumption item and involves draining the natural resources....

The discussion is starting to surface, though I would have been happier if this was pushed through in stronger economic times. Has the time finally come for doing the right thing?

TPPA and Jomo: The Academic Debate

Recently, KS Jomo has been in the headlines on his criticisms about the TPPA (e.g. here), or more specifically, the models that showed that the TPPA would be a net benefit to Malaysia (however marginal).

Some of his concerns I consider absolutely legitimate – assuming full employment and ignoring the impact on labour utilisation, labour income and inequality undermines the net-benefit conclusion of the CGE models most have used to analyse the TPPA. I also think that his call for the ongoing debate on the TPPA to encompass more than trade and include the socio-economic aspects should be supported.

Having said that, the GPAM model used by Prof Jomo and his colleagues has significant weaknesses too. Not least because the claim that Malaysia would see job losses, a reduction in the labour share of income, and a negative impact on GDP growth don’t stand up to much scrutiny.

I haven’t as yet tracked down the details of the GPAM model, but the paper analysing the TPPA (link here) treats Malaysia as part of a bloc that includes Singapore, Vietnam and Brunei as a single entity. How you can make any definite conclusions on a single country based on aggregated regional data is beyond me, especially since the raw data in the paper shows the labour income share dropping (pg 16; for the bloc as a whole), whereas Malaysia over the past decade and a half has seen the labour share of income stable and then rising.

I’m also really surprised that Jomo neglects the huge, huge impact that the TPPA will have on Malaysia’s labour laws, particularly in terms of freedom of association. For decades, trade unions have been highly restricted in how they can operate and to what degree (MTUC for example is registered as an NGO, and cannot operate as a trade union). That will change with the TPPA, and the resulting increase in labour bargaining power should, ceteris paribus, act to increase the labour share of income. That’s an institutional change that few if any models, trade or otherwise, incorporate in their framework.

For a more thorough critique of the GPAM model, try here. Prof Jamal notes the same problem as I did, and then some.

On a larger note, and this isn’t confined to the current topic, I wish more people would bother to read the damn academic papers before taking their conclusions at face value. It saves embarrassment in the long run.

Sugary Sweet

From a Bloomberg editorial this weekend (excerpt):

Mexico's Soda Tax Success

One of the world’s highest soda taxes appears to be working. After just one year, purchases of sugary drinks in Mexico are down 12 percent, a new study shows. Even better, the biggest reductions have occurred among the poor, who can least afford health care.

Other governments -- including in the U.S. -- should be encouraged to impose similar taxes and take other strong actions to curb soda drinking.

Sugary drinks are among the primary drivers of obesity, and Mexico’s obesity rate is the second-highest in the developed world, trailing only the U.S. But increasingly, obesity is becoming a global epidemic -- and it’s catching governments flat-footed....

I'm on the record as saying we should tax sugar, and wonder of wonders, somebody's actually tried it. Here's another article looking at the issue (excerpt):

Sugar Is the New Public Health Enemy #1
Governments try to reduce consumption of the sweet stuff through guidelines and taxes.

On Thursday, the U.S. government issued a new version of its dietary guidelines, which include the new, concrete recommendation that people receive less than 10 percent of their daily calorie intake from added sugar.

This is far more specific than the 2010 edition of the guidelines, which simply said to “reduce the intake of calories … from added sugars,” with no particular numbers attached. Based on Americans’ increasing sugar intake over the past few decades, a more concrete goal might be helpful—between 1977 and 2010, Americans’ consumption of added sugars went up by 30 percent, according to the Obesity Society….

…But for the time being, the U.S. isn’t the only country trying to get people off the sweet stuff. David Cameron, the prime minster of the U.K., said on Thursday that he wouldn’t rule out the possibility of a sugar tax as a measure against the obesity crisis, the BBC reports. A paper by Public Health England, published in October 2015, recommended a tax of between 10 and 20 percent on “high-sugar products … such as on full-sugar soft drinks.” Though Cameron said he would “rather avoid” a tax, he also said, “What matters is we do make progress” on obesity.

The evidence suggests a tax would likely lead to progress—according to a recent study published in The BMJ, when Mexico implemented a tax on sugary beverages on January 1, 2014, purchases of the taxed beverages went down by 12 percent by December of that year.

Legislating sugar is a strategy that’s popped up in the U.S. as well—Berkeley, California, was the first U.S. city to implement a soda tax in March 2015. But no word yet on whether Berkeley residents are any closer than the rest of the country to meeting the new dietary guidelines….

I’m also on record as saying we should tax petrol too, and for the same reasoning; taxes on fossil fuel use are even more common. Dare I wish it?