The WHO EWG’s proposals for taxes to fund medical R&D

• A new indirect tax (a consumer based tax)
• Voluntary business and consumer contributions
• Taxation of repatriated pharmaceutical profits
• New donor funds for health R&D

A new indirect tax

Indirect taxes involve a small tax being imposed on specified products or transactions. Typically the tax is paid by the consumer or user of the product/transaction, collected by the retailer and forwarded to the taxation authority. Once in place they are compulsory and offer varying degrees of diversity depending on the tax. These mechanisms aim to raise revenue and, in the cases of the tax on the arms trade and excise duties on tobacco and alcohol, to discourage the (excess) consumption of a particular product. In these cases there are likely to be positive spill-overs in terms of health gains. The digital tax involves a charge on traffic over the internet. It was first discussed in the 1990s and various proponents have put forward different versions of this tax. Examples include a tax of one US cent on every 100 e-mails of 10 KB sent, a charge per specific number of email messages (eg 10 cents per 1000 messages), a charge per SMS message and a charge by the quantity of information sent/received (eg for internet telephony and video). The key element is a very low charge.

Performance

Fund-raising capacity and additionality: An indirect tax could potentially raise very significant amounts of revenue:

• A 10% tax on the arms trade market might net about $5bn per annum.
• Digital tax or ‘bit’ tax: Internet traffic is huge and likely to increase rapidly; this tax could yield tens of billions from a broad base of users.
• Brazil’s CPMF: a tax on bank account transactions, set at 0.38% levied on paying bills online and major withdrawals, it was raising an estimate $20bn per year and funding some 87% of the Government key social protection programme – Bolsa Familia, before it was voted down. However, there is scope globally for bank transactions taxes to be expanded.
• The airline tax has raised around $660m over 2 years (mostly from France) this is expected to increase as more countries join (e.g. Portugal in 2009)1. Possible total revenues could amount to the low billions. At the end of 2008, Chile, Côte d’Ivoire, Democratic Republic of Congo, France, Madagascar, Mauritius, Niger and the Republic of Korea had implemented the airline tax; in addition Norway allocates part of its airline emissions tax to UNITAID.
• Tobacco taxes: Low-income countries are estimated to raise around $13.8bn in taxes on tobacco. Of 152 countries with tobacco taxes in place the tax rate is less than 25% in around a quarter of the countries. A 5-10% increase to the tax rate could net $0.7-1.4bn per annum. A similar increase in developed countries would net $5.5-11bn. Alcohol taxes are already widespread.

While funding projections can be made, ultimately revenue will depend on responses to price rises associated with the tax. Any government decision to implement or expand one of these taxes for the purposes of directing the revenue stream to developing world health would result in additional funds.
In order to estimate the size of the funds that could potentially be raised we take the example of the introduction of a very low indirect digital tax, which could be estimated to conservatively raise funds in the low billions per annum (US$3bn).

Likelihood: There is a more obvious link between the source of the funds and the purpose (health R&D) for the tobacco, alcohol and arms trade related taxes. However, as the airline tax has shown, such a link is not always necessary to appeal to both politicians and consumers. An indirect tax like a type of digital tax can be appealing to politicians and consumers who accept a small tax across a broad base with an altruistic purpose.

Operationality: Introducing a new tax or expanding an existing tax may require legal changes, nationally and internationally, depending on the tax, and ongoing regulation to ensure compliance. A new global tax would take longer to implement than expanding an existing tax within a country. A tax that is global in scope allows for developing countries to contribute to fundraising, and there is a willingness to do so as demonstrated by the airline tax. This framework could be applied to a type of digital tax.

As with the introduction of any tax there are trade-offs:

• There is only moderate certainty over revenue forecasts as actual revenue will depend on the response of providers and consumers to price rises associated with the tax and scope of the tax. Furthermore, as seen with the withdrawal of Brazil’s bank transaction tax there are occasions, although rare, when a tax is removed.
• Some of these taxes could potentially create perverse incentives. For example, the tax on arms trade is likely to result in an increase in illicit arms trading, (and therefore reduce the size of revenue); an excessively high tax on alcohol could encourage people to consume illicit and often dangerous alcohol products. An arms tax may have less political appeal than others as governments are essentially taxing themselves.
• Achieving a wide geographical coverage by some of these taxes internationally might be difficult as governments might be resistant to introducing them (e.g. The US is a notable omission from the airline tax citing problems with the tax dimension, but they are trying to capture the revenue through voluntary airline contributions rather than a mandatory tax.)
• The digital tax has additional operational hurdles to overcome, in that monitoring internet traffic in a cost-effective manner in order to tax consumers might prove to be a challenge. The digital tax could place a high burden on companies that depend heavily on use of the internet and sending large amounts of data over the internet. However, this could be overcome by appropriate scoping of the tax.