Taxation As A Deadly Event

Nick Schulz | 21 Aug 2006
Forbes

In the United States, opponents of the estate tax have dubbed it the "Death Tax" and argue that "death should not be a taxable event." Whatever the merits of a repeal of the estate tax, there is another, more pernicious kind of death tax--one that turns taxation itself into a deadly event.

The levies are placed on essential medical technologies in the developing world. These taxes are killers. But just as repealing the estate tax has gathered political momentum in the U.S.--and the estate tax is one of the most unpopular taxes, according to public opinion surveys--efforts to roll back taxes on life-saving technologies are gathering political force as well.

The taxes are varied and cover a wide array of products. They include duties on everything from vaccines, drugs and drug-making ingredients to medical supplies such as gauze, bandages and bednets.

According to a report published jointly by the Brookings Institution and the American Enterprise Institute, the African nation Lesotho "imposes a 10% withholding tax on all medicines" even though life expectancy there is 34 years of age. Over two dozen countries have tarriffs of 5% or higher on vaccines.

And according to the New York Times, countries such as Morocco, Nigeria and India have taxes and tarriffs on life-saving drugs ranging from 12% to 100%.

In the case of India, the taxes protect the country's domestic drug-making industry, which has the effect of threatening otherwise sensible steps to remove obstacles to treatment. For example, the Brookings-AEI researchers report that when Kenya recently bucked an East African Customs Union measure calling for a 10% import tariff on medicines, the head of the Tanzanian Pharmaceutical Manufacturers Association argued that Kenya's move jeopardized the region's industry.

African and Indian drug manufacturers say removing these levies will help Western drug firms. And they're right, they will. But poor, developing world markets are largely insignificant to the bottom lines of developed world drug firms who earn most of their profits in rich markets such as the United States and Japan. So the cost to these firms from taxes and tariffs is small, while the cost to poor patients is enormous.

Sometimes when governments are prudent and eschew tariffs on medicines, value-added taxes are levied imposing similar burdens. The government of South Africa imposes "a 14% VAT on all medicines," according to the Brookings-AEI report.

Textile tariffs are stamped on bednets that are used to fight malaria by keeping at bay the mosquitos that transmit the disease. The Times reports that "government taxes at least double the price that consumers pay for nets."

Despite all this, there are hopeful signs that things could change. Influential multinational health organizations are starting to look seriously at these taxes and are pressuring for reform.

The World Health Organization has examined the role played by taxes and tariffs on life-saving technologies in poor regions and found they generate very little revenue for government coffers and that "pharmaceutical tariffs could be eliminated without adverse revenue or industrial policy impacts."

The U.S. Food and Drug Administration has announced a technology breakthrough, where two drug firms were able to combine AIDS antiretroviral therapies into a single pill, making treatment easier. In the last few years, the cost of AIDS drugs in the developing world has dropped. It's important that once a technology like this is ready for the developing world, its delivery isn't larded up with tariffs, VATs or other barriers.

Warren Buffett recently announced a multibillion-dollar gift to the Bill & Melinda Gates Foundation. Much of the money will be used to pursue advances in medical technologies to benefit the developing world. Buffett is known for his opposition to repealing death taxes levied on estates in the United States. It would be a tragedy if a different kind of death tax served to keep from the patients who need them the very innovations his generous gift will be spurring. Maybe this is a death tax repeal even Buffett can champion.

Nick Schulz is editor of TCSDaily.com and is conducting research for a book about the role that institutions play in economic development.

http://www.forbes.com/columnists/2006/08/21/taxation-taxable-event-cx_ns_0821tax.html