Economist urges vigilance
Pierre Garello is a Professor of Economics at Université Aix-Marseille in France. During the nation’s parliamentary debate on the Biodiversity Bill earlier this year, he presented a study – ‘Economic Facts about Palm Oil Taxation in France’ – outlining why the proposed new tax is ‘factually and materially wrong’.
While the proposal has since been dropped, this may not be the end of the matter, as he explains in an interview.
French Senators put forward in early 2016 a proposal for an additional tax on palm oil. As an economist, what is your reaction to a plan to increase taxes on a food ingredient such as palm oil?
As a matter of principle I am sceptical of the new trend – in France and elsewhere – that consists of using taxation to change citizens’ behaviour. There are many reasons for this.
Firstly, economists have traditionally pushed in the opposite direction, namely, they usually advise governments to look for the most ‘neutral tax’ – the tax that changes decisions by private economic actors as little as possible. This traditional position comes from the fact that it is impossible to predict with a reasonable degree of accuracy the social outcome of specific taxes such as food taxes.
Consumers and producers can decide to pay a higher price for the same product (so the behaviour remains unchanged, but they buy less of other things), or to switch to another lower-taxed item, which can be even worse in terms of food habits and also mean no tax receipts.
Secondly, such taxes rely on ‘scientific’ assumptions such as ‘palm oil is bad for the environment’ or ‘margarine is not as good as butter’. This is problematic because the Parliament is transformed into some sort of an academy of sciences that should decide on complex scientific issues. In my opinion, our MPs do not have the required competencies. If, on the contrary, they say that each citizen must pay x Euros to finance public goods, there is no need to enter into a tricky and muddled debate.
Finally, even if this is not directly linked to economics, I see some danger in using taxes (and therefore coercion) to bring individuals’ behaviour towards what a majority of citizens would judge to be ‘proper behaviour’. This is not my understanding of a democracy.
As the debate progressed on the tax proposal, you provided a report on ‘Economic Facts about Palm Oil Taxation in France’. Could you explain your findings and methodology?
The proposed amendment would have created an additional contribution for palm oil set at 30 Euros per tonne in 2017, 50 Euros in 2018, 70 Euros in 2019 and 90 Euros in 2020. This rate would have then increased on Jan 1 each year starting in 2021, depending on the projected evolution of consumer prices. The tax was to be applied to palm oil only and not competing oils. This proposal was backed with various arguments that were dubious or plainly wrong.
My report focuses on the Parliamentarians’ claim regarding the ‘tax advantage’ that the present regulation would be giving to palm oil. According to them, palm oil would currently benefit from a favourable tax treatment more than almost any other vegetable oil. This statement is plainly wrong. The mistake (whether or not it is a voluntary one is an open question) comes from the fact that the Senators use so-called ‘Excise Duty tables’ to compare the taxes on different oils.
Now, excise duties are traditionally given in Euros per tonne and if you look at those tables you note indeed that olive oil is taxed twice more heavily than rapeseed and almost twice as much as palm oil. But do those comparisons have any economic meaning? The answer is a resounding ‘No’. From an economic point of view, what makes sense is not the duties paid per tonne of vegetable oil but the relative weight of taxation in the market price of those oils.
When you buy a Ferrari, you don’t inquire about the tax per tonne; what is economically meaningful is the sales tax (or VAT). What would appear unfair to many would precisely be to tax all cars according to their weight, since the owner of a Ferrari would in that case pay probably less tax than the owner of a poor- quality car.
So what I did in the report was simply to translate the ‘Excise Duty table’ where taxes are given in Euros per tonne into the equivalent ad valorem rates that have a clear economic meaning. And the results were completely at the opposite end of what the Senators claimed: Palm oil is already taxed much more heavily than most of its competitors.
Let me be more precise. Because the market price of olive oil is extremely high (3,852 Euros per tonne) an excise duty of 189 Euros per tonne means that the economic rate at which olive oil is taxed is as low as 4.9%. Let us compare this with palm oil. The excise duty on palm oil is at 103 Euros per tonne but the market price for one tonne of palm oil is 478 Euros (December 2015). So, the economic rate at which palm oil is taxed is 23.64% – between four and five times more than olive oil!
So, where is the unfair tax advantage given to palm oil by French law? There is clearly no such advantage and if the amendment had been voted into law, the situation would have been worse with palm oil taxed up to 209.7% by 2020.