Finance & Development – IMF
In this March 2026 article, Marius van Oordt and Christoph B. Rosenberg examine how excise taxes on harmful products can serve both fiscal and public health objectives. These taxes—applied to tobacco, alcohol, and sugary products—are widely used because they are relatively easy to collect and generate stable revenue. However, changing consumption patterns and new product innovations have made existing tax systems less effective. As a result, the authors argue for a more comprehensive and health-aligned approach to taxation.
Revenue potential and policy limitations
Excise taxes provide an important source of government revenue, averaging about 2 percent of GDP in both advanced and developing economies. Tobacco taxes generate the highest revenue, followed by alcohol, while taxes on sugary drinks remain less common and yield lower returns.
However, simply increasing tax rates is not sufficient. Consumers often respond by switching to untaxed or illicit alternatives instead of reducing consumption. Consequently, poorly designed tax systems can undermine both revenue and health objectives. A more effective approach requires understanding consumer behavior and the structure of markets.
Aligning taxes with health risks
A central argument of the article is that taxes should reflect the degree of harm associated with each product. This includes both direct health effects and indirect consequences, such as secondhand smoke or drunk driving. In practice, this means taxing based on harmful components—such as alcohol content or sugar levels—and methods of consumption.
Recent advances in medical research and data availability make it easier to implement this approach. Many countries already tax products based on measurable characteristics, such as sugar per liter in beverages. This system allows policymakers to adapt to new products and shifting consumption patterns. For example, the rise of low-alcohol drinks and alternative nicotine products requires differentiated tax rates.
Addressing loopholes and unintended incentives
Despite progress, many tax systems remain inconsistent. Some harmful products are untaxed, while others face disproportionately high rates. These gaps weaken policy effectiveness and can encourage consumption of riskier alternatives.
Examples from multiple countries illustrate this problem. In some cases, traditional or locally produced products are taxed at much lower rates than comparable goods. This misalignment sends incorrect signals about health risks and may disproportionately affect low-income populations. As shown in the comparison across G20 countries, taxation is strongest for tobacco but less consistent for alcohol and especially weak for sugary drinks.
The need for international coordination
Cross-border differences in tax rates create additional challenges. Consumers may purchase cheaper products in neighboring countries, reducing both revenue and health benefits. For instance, differences in alcohol taxation within Europe have led to significant cross-border shopping and revenue losses.
Similarly, low-tax jurisdictions can become hubs for illicit trade. Paraguay, for example, supplies a substantial share of cigarettes consumed in higher-tax neighboring countries. Therefore, effective taxation requires coordination across countries to reduce arbitrage and smuggling.
The article concludes that taxation is a powerful tool for shaping healthier behavior and generating revenue. However, its effectiveness depends on aligning tax rates with health risks, closing loopholes, and strengthening international cooperation.
Reference
Van Oordt, M., & Rosenberg, C. B. (2026, March). Taxing harmful habits. Finance & Development, International Monetary Fund. https://www.imf.org/en/publications/fandd/issues/2026/03/taxing-harmful-habits-christoph-rosenberg