TCS Daily

Taxed to Death

By Roger Bate - April 21, 2005 12:00 AM

Earlier this week The Global Fund to Fight AIDS Tuberculosis and Malaria claimed that India has replaced South Africa as the most AIDS-diseased country in the world. India's continuing struggle to deal with its AIDS problem is tragic, but some good may come from this story. Now that India has moved to the fore of global efforts to combat AIDS, perhaps the world will begin to notice that the Indian Government has erected extremely onerous tariffs and taxes on the very products that can save its citizens' lives.

Rich countries have largely abandoned taxes and tariffs on medical products since they realize that taxing such products harms the sickest and poorest in their countries. But that is not the case in many poor countries.

On Thursday, two colleagues and I released a paper in which we analyze the tax and tariff rates on essential medicines and medical supplies for most of the poorest countries in the world. The results are startling. Our statistical analysis estimates that a 1% reduction in tariffs could increase access to medicine by just over 1%. And given that many poor countries have financial barriers of greater than 20%, this is a significant finding. It means that a removal of tariffs in the developing world would, conservatively speaking, probably lead to an increase in access for over 100 million people. In India alone, with tariff and tax rates combined of 61% -- and with only 35% of the billion-person population having access to essential medicines -- a removal of barriers should increase access enormously, by tens of millions of people.

Through these restrictions, India aims to protect its large copycat pharmaceutical industry, and many of its 22,000 drug companies certainly benefit from the protection. But given that fewer than 50,000 Indians receive HIV drug therapy, one wonders whether the Indian Government has its priorities straight.

Brazil, another country with a domestic drugs industry, has combined taxes and tariffs of 38%, which act as a barrier to entry for drugs that are not produced domestically.

African countries generally have lower tariff and tax rates, but all are onerous given how poor the continent is. The Congo has a 30% tariff rate, Tanzania and Kenya have high combined rates of 38% (none of these countries is protecting a domestic industry). Even South Africa has a 14% sales tax on medicines. Lesotho, with a life expectancy of just 36.3 in 2002, imposes a tax on all medicines that raises prices to consumers by 10 percent. In South Africa, despite the fact that the government passed draconian drug pricing regulations in an effort to lower the cost to consumers, it still maintains a 14 percent VAT on all medicines.

Given that many poor South Africans have to buy their own HIV medications -- and considering how many of them are malnourished -- we also calculate how much food they could buy if this tax were removed. For some it will be the difference between eating enough to tolerate the medicines and being too malnourished to be able to maintain treatment.

It is the sovereign right of any nation to set taxes and rates. But when so many countries have been complaining about the price of medicines and demanding aid, it seems odd that they would erect barriers to the treatment of their sickest citizens. Most of the rich countries of the world have removed all taxes on life-saving interventions. It is time the poorer world did this, too. For example, malaria costs the African continent 1.2% of GDP a year, anything that slows prevention and treatment of this draining disease is economic folly. These taxes and tariffs are odious and should be repealed.


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