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When today’s high-income countries were looking for revenues in the 18th and 19th centuries, “tobacco rum and sugar” (as Adam Smith wrote) were considered perfect candidates for raising revenues. Over time, such excise taxes have played a smaller role in their total revenues and the focus on such “health taxes” has shifted toward their public health benefits. Nevertheless, today’s low-income countries are having difficulty raising the resources they need for public programs. Health taxes could be a new revenue source that addresses this problem.
While excise taxes decrease consumption and create public health benefits, the central focus of this paper is on the revenue they generate. The paper provides a comprehensive overview of issues relevant to using health taxes to raise revenues in low-income countries. The paper argues that in low-income countries, health taxes can raise enough revenue to make them worthwhile and that health taxes may be better candidates for mobilizing domestic resources than some other taxes. It reviews some of the concerns about excise taxes, such as illicit trade, and shows how they tend to be exaggerated and that solutions are available. It explains how to design health taxes to be more effective and efficient; and concludes by discussing political strategies that have been used to successfully enact health taxes in many countries.