Opinion: Can taxation be a force for good?

By Simon Cawdery, Compass columnist 

No!  Absolutely not!  No way!  Have you lost your marbles, sir?

Were those your gut reactions to the question? You’re not alone, and it’s not unreasonable to have such a reaction given the huge overspending, waste and lack of accountability that exists in Cayman’s budgetary process.

But hear me out, please. What if taxation could actually improve our health, reduce government costs, and make Cayman a healthier place to live?

My goal, in this article, is to persuade you of a taxation change that can happen, immediately, in Cayman that will be unambiguously a force for good: It will improve long-term health outcomes of people, it will reduce government healthcare costs, and it could even raise revenue for the government.

To work on this article and give it the necessary scientific weight that it needs to be persuasive, I have partnered with a registered dietitian to explore the science behind the issues discussed here. The related article is an explainer on the key health issues linked to sugar (spoiler: sugar is the focus of this article and discussion).

Using tax policy smartly

One thing that’s common around the world is for health services to be concerned about the growing rate of chronic diseases including obesity, diabetes and heart disease.

Many countries have tackled health epidemics by taking cues from their approach to cigarettes – an addiction that caused widespread harm and high healthcare costs.  Most countries reacted by banning cigarette advertising, placing stark health warnings on packaging and, perhaps most meaningfully, using the tax system to discourage consumption.

In the UK, for instance, the tax on a packet of cigarettes is over £6.30 per packet plus 16.5%. Given that the average price of a packet is around £12 this means that the tax on a packet in the UK accounts for 67% of the price. Put another way, the tax rate on cigarettes is over 200%. This has proven to be unambiguously effective and, as a result, helped cut consumption. Reduced consumption has led to far-improved health outcomes for those who would otherwise have smoked, and substantial financial savings for the healthcare sector. Some of those policies seemed shocking at the time but now they are almost universally recognised as a highly effective and highly efficient use of the tax system.

The same approach should be replicated with sugar. Sugar has horrific, often hidden, side effects (see related article for the science). The tax system can help combat the problem and save the country tens of millions of dollars.

A purist might argue that it shouldn’t be any of the government’s business what I or someone else puts in my body. In theory I agree, but this fails brutally to understand the concept of ‘externalities’.

If a human being could ingest an unhealthy product and cause no externalities whatsoever then probably it should be no business of the government. Governments can and should help educate but fundamentally freedom of choice should be a basic human right.  However, individual freedoms are rightly subject to constraints if they cause harm to other persons (whether wilfully or inadvertently).

Cigarettes were identified as causing harm to third parties who were innocent of the addiction (passive smoking). Healthcare systems realised that people turning up at hospital needing treatment for lung cancer was an expensive drain on precious resources. With limited doctors and limited funds, every patient needing treatment for lung cancer, caused by cigarette smoke, means other patients with other diseases might be left untreated or funds not available to buy the latest treatment technology for the other illnesses. These forms of externalities should, quite reasonably, be factored into the ‘freedom of choice equation’.

So, it is with diet. Science has moved on in this space sufficiently over the years to be able to clearly articulate that certain food groups are both dangerous to health and highly addictive. As an aside, the high that comes with consuming sugar is calculated by scientists to be greater than that from cocaine, and most governments ban cocaine use.

Hold on, I hear some of you cry: “My Burger King meal, my bottle of coke or my favourite candy isn’t doing anyone else any harm, leave me alone.”

It might seem that the self-consumption of sugary foods is an individual’s sole problem and not a topic for tax policy. But look closer and look at the burden on the healthcare system.  Type 2 diabetes and clinical obesity are two incredibly draining illnesses that consume huge financial sums in most healthcare systems. (Type 2 diabetes and clinical obesity being two diseases commonly connected with excess sugar consumption).

According to the International Diabetes Federation, 13.8% of Cayman’s population is affected by type 2 diabetes – a stark contrast to Jamaica’s 11.6%, or the UK’s 5.6%.  Contemplate for a moment what health insurance companies think of when they see statistics like this. They see long-term illnesses that cost hundreds of thousands of dollars per person to treat and quite logically price their premiums accordingly. Multiply that by almost 14% of the population and the sums become huge. Think then of all the doctor hours, hospital hours and medical treatment costs incurred in diagnosing and managing these illnesses. It all adds up to a huge monetary burden on Cayman, Caymanians and our collective state of health.

There are so many clear parallels between cigarettes and sugar. It is incredibly rare for increased taxes to be welcomed, but this is unambiguously an area where they should be; sugar consumption causes real, lasting, long-term harm in terms of health and economics.  It, and other diabetes-inducing foods, should therefore be taxed according to precisely this harm that they cause.

Sugar taxes rather than sugar highs

In Cayman, raw sugar currently has a zero percent import duty.  Confectionary has a 22% import duty, sodas a 27% duty.

Compare that with the duty on healthier products. Their duty ranges from 0% (for fish) to 22% for avocados, with most fruits or vegetables being charged around 17%.

Given that fruits and vegetables are often more expensive to start with (the cost of importing perishable goods being a main cause of this) it is clear that the tax system simply isn’t helping and was evidently written for a bygone age.

What could be done?

The first step is raising taxes on sugar and fast food from the current 20-27% to at least 100%. For context, cigarettes are taxed at 102% (although there are many very reasonable arguments to suggest this tax rate should itself be doubled). By aligning sugar taxes with health impact, we can reduce consumption and improve long-term health outcomes.

The extra revenue generated from the increased tax could go into the healthcare system, supporting those most in need. Some might argue that such a significant tax hike could sharply reduce consumption of unhealthy products, thereby actually lowering tax revenue.  If so, perfect. That’s precisely the outcome desired.

Reduced consumption would bring substantial long-term health benefits and positively impact Cayman’s fiscal position. In other words, even if tax revenue declines from this initiative, the future savings in healthcare costs and improved public health would far outweigh the short-term trade-off. A small sacrifice now for a healthier, wealthier future Cayman.

But don’t stop there

Fruit and vegetables should then be zero-rated. Why disincentivise people to live healthy lives by taxing these items at all? The loss of revenue will be trivial but the benefits meaningful.

We could and should then go even further. Government could introduce a healthy nutrition scheme whereby subsidies or low-interest loans are given to entrepreneurs willing to build large-scale vertical farms. Cayman could potentially become entirely self-sufficient in fruit and vegetable production. With no shipping costs and reduced transportation times, the food we eat will not only cost less but may even taste better and likely be more nutrient-rich. Added to which, money will be invested in Cayman, new industries generated in Cayman, people employed in Cayman, and a virtuous economic cycle generated.

Cayman likes to brand itself as the ‘culinary capital of the Caribbean’. This policy even benefits that branding … local farm-to-shelf-to-table produce. Imagine how that would appeal to our wealthy tourists.

There’s no magic bullet, but there very much are some obvious, effective and implementable ways to help slow or even stop an epidemic in its tracks. All it takes is a little courage, a little effort and a little innovation. With thoughtful tax policies, Cayman can pave the way for a healthier, longer-living population, whilst reducing healthcare costs and improving overall quality of life.

Cayman’s cost of living can even be reduced at the same time. The days of the $13 cauliflower could, and really should, be long behind us.

Simon Cawdery, CFA, is an investment manager and governance professional who lives and works in the Cayman Islands. He writes regularly for the Compass.