Increase the VAT burden on meat products: The perfect solution?
Mariana Rapoula of Lobo Vasques explains why so many are in favour of raising meat prices and increasing the tax burden on meat products.
As the world’s population has expanded, so has the demand for livestock farming and meat production and, with it, the global greenhouse gas emissions (GHG emissions).
According to recent studies, food accounts for over a quarter of GHG emissions and the impacts of animal products exceed those of vegetable substitutes to such a degree that they require the use of 83% of the world’s farmland. The failure to reduce GHG emissions could preclude meeting the climate goals of the Paris Agreement and fall short of the Kyoto Protocol targets. Eating meat has also been linked to various cancers, heart disease, and diabetes.
The academic evidence regarding environmental issues associated with meat production and health problems caused by meat consumption is indisputable, making the meat industry a perfect candidate for behavioural economics and taxation model proposals from activists, scholars, and policymakers. The discussion has been gaining momentum worldwide, mainly in Europe, where excise taxes on tobacco, energy products, alcohol and more recently, sugary drinks, have a proven track record.
In the US, the Farm Animal Investment Risk and Return initiative, among others, have already warned its investors that a tax on red meat may be imminent, despite claims that President Biden's most recent climate plan does not seem to include any meat intake or production-related policies. International organisations, such as Greenpeace and PETA, have also been calling for an excise tax on meat to help cover the health and environmental costs arising from using animals for food, urging governments worldwide to act on it.
It seems evident that the negative externalities of meat are not reflected in retail prices and have remain unaddressed by policymakers, mostly because of its cultural component, expected resistance and potential adverse effects on the economy.
Red meat rhetoric?
Considering that consuming less meat would benefit both the environment and individual’s health, it should come as no surprise that many are pushing for a sin tax on meat; as the same arguments put forward for the taxation of sugary, alcoholic drinks, tobacco, or energy products can be used for an excise on meat.
When it comes to products such as meat, and considering the current dietary patterns of the world’s population (see OECD-FAO Agricultural Outlook (Edition 2020)) excise taxation may, however, be a challenge. According to the latest data (OECD (2021), meat consumption (indicator), doi: 10.1787/fa290fd0-en), on average, meat consumption worldwide is around 6.279 kilograms of retail weight per capita yearly.
Critics argue that a flat and regressive tax, such as an excise on meat, would greatly impact lower income families who are more likely to buy meat, however, the OECD data shows the exact opposite: that meat demand is actually associated with higher incomes.
Designing a tax aiming to burden the taxpayers to the extent of their environmental and health damages, could prove effective even if low-income population is usually more price driven/responsive, provided that the demand is sufficiently elastic or cross price elastic, which studies such as the ‘Meat Demand Monitor’ by Kansas University, which follow the willingness to pay trends, seem to demonstrate.
If done wrong, and without factoring in the producers’ response, price and tax structure and cross elasticity, it could have a potential damaging impact and result in a reallocation of spending in cheaper meat cuts, promoting even less sustainable production practices and quality and eco standards, instead of redirecting the consumption to plant-based alternatives. Furthermore, it is fairly consensual that a tax such as this one would likely result in social protests and unrest.
Excises may not be the answer. In fact, the taxation of meat and the regulation of this sector should call for comprehensive, harmonised and progressive tax policies. Could a targeted externality-correcting policy be found in VAT?
The devil is a shape-shifter… but so is VAT
A compromise solution and potentially just as effective in redirecting consumption to a plant-based diet may be found in VAT, as currently, most countries impose a VAT reduced rate on meat.
Increasing the VAT burden on these products, while lowering it for plant alternatives, or even creating a VAT exemption for vegetables and fruits, may be the perfect solution to achieve behavioural changes in consumption trends and tackle vertical equity and excessive or potential regressiveness.
This solution may also help tax morale, and progressive models, as it may be phased or even adjusted to fit each countries’ specifications and rate structures.
Being a solution that favours the existence of transitional regimes – which could establish an intermediate rate for a given period of time, or where a measure to support the organically produced meat and dairy products could be put in place – it may be easier to adopt, mainly in countries where more resistance from consumers and producers is expected.
Interestingly enough, a recent representative consumer survey conducted by True Animal Protein Price Coalition (TAPP) showed that 70% of West-Europeans are in favour of raising prices and increasing the tax burden on meat products, which seems to indicate that tax morale may not even pose as big of a problem as many decision makers expected, at least, in developed countries.
But would this solution, without an ad valorem GHG emissions index, be sub-optimal and fail to meet the Pigouvian tax goals of targeting GHG emissions and higher polluters?
Consultant, Lobo Vasques