"Taxation Needs to be Correlated to the Risk and Damage Products Produce."

January 31, 2023 - Taxation is always a hot topic in the Croatian economy. Professor PhD Fernando Pinto Hernández from Rey Juan Carlos University in Madrid with some thoughts on special taxation on energy and tobacco, in an interview in today's Jutarnji List, which is translated below in full.

We talked to a global tax expert, he says that the Croatian economy is at risk: 'You must not prolong this measure'

Decrease of taxation is important to stimulate economic growth. Equally important is the level of taxes and the tax burden, as well as the design of the tax system itself. In the field of special taxes, it is important to design a tax system that differentiates products according to their characteristics and harm to individuals, society and the environment. Such an approach is important because of the long-term social and economic effects, stated prof. PhD Fernando Pinto Hernández from Rey Juan Carlos University in Madrid, referring to special taxes on energy and tobacco.

What is your opinion on the tax policy at the EU level in the context of the energy crisis and inflation?

The problem with inflation, which partly stems from the rise in energy prices, must be accompanied by public policy decisions containing some taxes (progressive ones), such as personal income tax, and lowering others (regressive ones), such as VAT on some commodities or special taxes on consumption.

Due to the crisis, Croatia introduced a tax on extra profits for companies in 2022, regardless of whether they profited during the crisis. What do you think about such taxation and what is the situation in Spain?

I hope that these tax policy measures, which significantly increase the tax burden on companies in certain productive sectors, are temporary. In other words, they should not be prolonged for too long, as they will lead to significant efficiency losses in the Croatian economy, which is already experiencing difficulties due to both rising inflation and its recent entry into the euro area. In the case of Spain, very similar measures are being implemented and therefore the results could be the same if the fiscal policies are not very temporary.

Is it logical to significantly tax potentially harmful products such as tobacco?

It seems logical to tax those products that generate a negative externality of consumption, i.e. that cause damage to the health of others that is not reflected in market prices. However, we need to take into account the real health risk they pose in order not to over-regulate them and impose extraordinarily high taxes. In even simple terms: yes to taxing them, but the level of taxation needs to be correlated to the risk (and damage) these products produce.

What have the experiences of countries such as Sweden, Italy, and the Czech Republic shown considering they followed the principle of higher taxes for harmful products and lower taxes for less harmful alternatives?

What they have shown is that, by setting excise taxes according to the health risk posed by these products, efficient tax policy outcomes are achieved. It could be summarized as a tax policy whose slogan is that “the lower the risk, the lower the taxes”. From my point of view, these countries are an example of success in terms of taxation design.

France proved to be a negative example and what are the prerequisites for designing a good tax policy?

When taxes and public policies lack a technically based design, the desired outcome often turns out to be the opposite. In the case of France, this is exactly what has happened: in an attempt to reduce the prevalence of tobacco by raising prices, the population has opted for substitute goods of poorer quality and greater danger (e.g. illicit tobacco).

How to use taxation as a tool to stimulate growth?

Economic theory indicates that for a tax to have a positive effect on economic growth it must fulfil several premises. The first of these is to have a good technical design. The second is that it should aim to replace the efficiency loss caused by its introduction. And finally, the tax must entail the least possible loss of purchasing power for the taxpayer, as this is the only way for the taxpayer to feel free to consume, save or invest his or her money.

The fight against tax evasion and tax fraud is one of the priorities of the EU. Can this battle even be won?

It is very difficult to fight tax fraud. However, over the last ten years, the European Union and individual countries have implemented their anti-fraud policies very significantly. I would like to think that the battle can be won, but in order to do so, the tax burden and the tax effort of taxpayers must be reduced as much as possible while guaranteeing quality basic public services. This is particularly true when we think about the inefficiencies in re-distribution.

This article appeared originally in Croatian in Jutarnji List - you can read the original here.