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Debate: Reducing value added tax on contraceptives

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Should VAT on contraceptives be reduced?

Background and context

Value Added Tax: Firstly it is important to realise what Value Added Tax represents. It is essentially an "ad valorem" indirect taxation on the majority of products sold. It differs from other indirect and specific taxes insofar as it is a percentage. This means that as the quantity of the product increases so too does the tax amount. VAT is applied on our "wants" and not on our "needs". It is up to the government to decide what we want and what we need and thus acts as a crucial fiscal policy measure. Over 120 countries worldwide have introduced VAT over the past three decades.[1]

There are three main types of VAT:

  • a standard rate, Britain: 17.5%
  • a reduced rate, Britain: 5%
  • a zero rate, 0% on any good or service sold. This applies to necessities - food, books, drugs. The zero rate is designed to encourage use of the item as the government views it as a "merit good".

Contraceptives: Contraceptives include all forms of birth control items including condoms; referred to as "sheaths", the pill, diaphragm etc. The essential idea of this argument is that contraceptives should be viewed as necessities and therefore have a zero-VAT. In this way the use of them would be vastly encouraged because they are more affordable. Ideally family planning would be easier and the level of pregnancies - especially with teenagers - would drop. Recently this topic has been brought to the forefront of political agenda. In the 2006 Budget Britain reduced the VAT on contraceptives to the "reduced rate" of 5%.(see news article)This was part of an attempt to combat teenage pregnancies.

It is interesting to note that virtually all products have VAT on them. Considering the theory was only invented in 1954 this seems incredible bold. However, VAT funds large proportions of government spending. Currently the EU believes that there should be a tax on everything: "The zero-rate is not featured in the EU Sixth Directive as it was intended that the minimum VAT rate throughout Europe would be 5%. However, zero-rating remains in some Member States, most notably the UK, as a legacy of pre-EU legislation. These Member States have been granted a derogation to continue existing zero-rating but cannot add new goods or services."

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Will cheaper contraceptives encourage their usage?

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Yes

  • Reducing the VAT would help especially in Africa It seems ridiculous that African people should have to pay VAT. Yet in South Africa the rate is 14% (a reduced rate is 0%) and Egypt does not even have a reduced rate. This is one of the simple reasons why 97% of Africans can't afford condoms.
  • A reduced VAT will have the greatest impact on the most at-risk groups. Price was thought to be a particularly significant factor for some of the most vulnerable sexual health risk groups, and any price reduction could therefore have its major impact on condom purchases and use amongst these groups.
  • Reducing the VAT on condoms will save citizens money: In Britain alone, with just a 12.5% decrease in VAT consumers would save £5 million on the cost of condoms alone. This is a good amount of money, and would be much better placed in the hands of citizens and consumers.
  • People shouldn't pay a luxury tax on condoms, an essential good. Euan Sutherland, the managing director of Superdrug, said: "We are delighted that the Treasury has heeded our calls to make a change in the VAT rules. The rules do not make sense and this is just the first of a series of challenges we will mount to ensure our customers don't pay a luxury tax on the items we know are real essentials." [2]



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No

  • The tax is only a tiny percentage of the total price: In Britain the amount of taxation on contraceptives is 5%. 5% on for instance, £2 does not amount to a very large cost (10p). Is a 10p cost enough of an incentive to reduce tax on all contraceptives? Would the reduction in tax just be on condoms or other forms? If the figure is indeed 17.5% then admitably the saving is significantly greater but depending on the nation this may not be enough.
  • Those in the lower income bracket can obtain these for free: Whether through NGOs or medical services and family planning units many nations offer free contraceptives as part of their family planning policies. The wealthier individuals would purchase them privately, to obtain certain brands etc, but poorer members of society can obtain them through clinics. As they are free the level of taxation does not matter.
  • Other factors, have a greater affect on the use of contraceptives: The Catholic Church plays a major role in determining whether or not people will use contraceptives. As it is believed as wrong or "against the natural way of things" it is discouraged. One could argue that such influences have a bigger effect on contraceptive usage and thus should be tackled before any reduction in VAT.



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Will cheaper contraceptives stop issues like teenage pregnancy?

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Yes

  • A reduced VAT on condoms will reduce teen pregnancy Sexually active teenagers are particularly less likely than other individuals to purchase high priced condoms. This is simply due to their common financial difficulties relative to other people. By reducing the VAT on condoms, it is presumable that the number of teenagers buying condoms will increase, subsequently increasing usage and decreasing teen pregnancy rates as a result.
  • Lowering the VAT is important to Britain's public health: Opinion of Jan Barlow, chief executive of Brook a sexual health charity for young people: "Cutting VAT will not only benefit the people left with some extra change in their pockets, it will also help services such as Brook's which buy contraception in bulk to give away to young people who can't afford to pay for it. This move is a valuable contribution towards improving Britain's sexual health." Figures out earlier this month showed attempts to reduce the teenage pregnancy rate were behind target despite a £150m campaign (Britain). Contraceptives are a necessity. With this in mind they should be classified as any other necessity in the eyes of tax collectors. That is, the value of taxation should be minimal if not zero %. BBC news and opinions on the 2006 Budget
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No

  • Cheaper contraceptives may increase teenage pregnancy rates: Cheaper contraceptives may encourage more under-age sex. Governments should tackle the illegality of under-age sex as opposed to making it easier for them. Experimentation and lack of education could lad to worse results that simply poor people not being able to afford all contraceptives.
  • Free contraceptives are better for encouraging their usage as opposed to less VAT. In Britian the access to free contraceptives has been vital. Last year it emerged that as many as one in three children has easy access to condoms and emergency contraception at secondary school. The UK has the highest rate of teenage pregnancies in western Europe, with 95,000 conceptions last year, resulting in 58,000 live births. The Government has pledged to halve the teenage pregnancy rate by 2010 with a series of initiatives recommended by its Social Exclusion Unit. The free contraceptives offered and their accesibility helps to accomplish this. Daily Mail Source.
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Economic argument: in the long run, governments benefit more from reducing VAT on contraceptives:

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Yes

  • Theoretically lower taxes mean a better usage of public health funds. Those in higher income brackets will pay for contraceptives from the private sector meaning that those less well off can use the public sector healthcare and therefore equity is achieved.
  • Reduction in administrative costs: The government will not have to moniter VAT collection on several items and thus admin costs will be cut. Although a true estimate of how much they will be cut by is hard to find it is surely an incentive and means that the revenue and custom departments can concentrate on other areas.
  • Privatisation can result from cheaper costs: In the Phillipines an incentive to cut VAT and Duties on contraception imports was due to the increased liklihood of privatisation. If there is less tax the businesses can charge more (as there is less tax incidence on both the consumer and the producer yet the consumer will not lose out), or are more likely to recieve supernormal profit. This will encourage more businesses into the market supplying contraceptives. As a result market forces will lower the price and increase the quality meaning that overall contraceptives become more avaliable.
  • Increased sales means a greater GDP: A decreased price (as there is no longer VAT on an item) will increase demand (basic economic theory). As a result this will increase the revenue a private or public enterprise recieves and thus economic output of a nation increases. It may also act as an incentive and encourage diversication. Identified by a study to test the effects of a decrease tax
  • Reasons for reducing the import duty and other taxes in the Phillipines and resultant effects.
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No

  • Governments earn massive amounts of revenue from VAT: In France, it is the most important source of state finance, accounting for approximately 45% of state revenues. The VAT is desperately needed from all areas to finance government spending. If it is suddenly lost from such a crucial area, where will the government gain money to finance family planning policies. It is a sort of double negative. Decrease VAT means a decrease in family planning.
  • The government can change a high amount of VAT and so earn more: Contraceptives, like other "necessities", have a very inelastic price elasticity of demand, hereafter PED. This means that as the price of the item increases, the demand for the item increases by less proportionally. Therefore the government can increase tax and gain a very large revenue. To remove items with such a low PED would mean that the government is losing a lot of revenue that needs to be covered somehow.
  • Economic theory states that VAT may not be the best form of taxation: To maintain economic efficiency Kenneth Arrow suggested that instead "all efficient outcomes can be acheived in a perfectly competitives market, simply by adjusting the starting positions". This proposes the idea that instead there should be lump-sum taxes on richer members of the population. Similarly, although automatic stabiliers (which automatically control economic growth as they are a percentage taxaton, usually) mean that government control is minimal.
  • Is it fair that all members of the population should recieve a cheaper price rather than those who need it? The example can be seen in the "Undercover Economist": Is it fair for a pharmaceutical company to provide a pill for £1000 for several weeks when it costs merely £100 to produce. The amount of research and other costs perhaps can justify this and they will only charge the price based on the demand for a product. If demand is high price is high. Next, is it fair that they provide this price worldwide? Surely this would not be justified as people in LEDCs cannot affourd the drugs. Thus the company adopts a pricing strategy to have a lower price for these individuals and it seems fair once again. Where this applies to contraceptives and VAT is how the people of the MEDCs (the richer members in our population) should pay the higher price because they can afford it and would pay anyway. However the people of the LEDCs (representing those of lower-income brackets) should pay a smaller amount. Thus a decrease in VAT is not a successful as subsidies to those that cannot afford it. This will give poorer people an opportunity to decide whether they should spend the extra money on contraceptives or not because in many cases this will not be necessary.
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Are there better alternatives?

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Yes

  • VAT reduction has a brilliant trade-off and is thus the best alternative: If there is still VAT on the product the government is still earning money. Similarly reducing the amount to the "zero-rate" shows the electorate that they want to take firm action against it and are willing to incur opportunity costs. Furthermore, it is the easiest method to implement and in the benefit of the pharmacy owners, etc, who see it as in their best interests to keep up to date with a reduction in VAT as they earn more money.
  • Overall the reduction of VAT is the best solution but it depends on the nation:The definition of the debate should stipulate that the argument only applies to those nations with VAT on these products. The idea is that the reduction of VAT is beneficial to all nations in general due to the arguments mentioned. Although rare cases might be proposed where the nation is in desperate need of money the proposition should clarify that on average this is the best, and most effective policy for the largest number of nations.
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No

  • It would be better to have free contraceptives avaliable to all. The idea of reducing VAT is so that contraceptives are cheaper and thus used more often. Surely the best way to achieve this is with a government subsidy reducing the price of necessary contraceptives (i.e. not those built for luxury) so they are free. Arguement: 2003 global survey by UNFPA revealing how many nations offer free contraception.
  • All over contraceptives should be accessible over-the-counter: It would be better to see how feasible this policy is before adopting the reduction of VAT on all contraceptives. "A Report Reviewing Current Policy Papers on Contraceptive Prescribing and Tariffs" revealed that the "experience of other countries in reclassifying contraceptives" so that they could be accessed over-the-counter was vastly beneficial and suggested to the Phillpean problem.
  • Sales of condoms account for 99 per cent of all ‘over the counter’ sales of contraceptives: This is the curretn situation in Britain and a positive step to making condoms accessible.
  • Other measures that Britain has been using over and above the VAT reduction that seem better when used as well as a reduction in VAT: Measures announced to date include a high-profile national campaign aimed at increasing awareness of sexually transmitted infections (STIs) and promoting the protective benefits of condoms. The Government has also committed funding for the improvement and upgrading of NHS genito-urinary medicine (GUM) and contraceptive services, and for a National Chlamydia Screening Programme.

See also

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