In January 2021, the UK became the latest country to abolish the so-called tampon tax, a catchy umbrella term that refers to the application of general consumption taxes, most notably VAT, to female sanitary products. The move followed in the footsteps of several other countries, including Canada (2015), Australia (2019), and Germany (2020), which in the last few years had also taken action to either exempt or apply reduced rates of VAT to those products. Discussions are ongoing in various others, including Brazil and the US, where campaigns in favour of the abolition of the tampon tax, often led by women’s rights activists, have been gathering political momentum.
These changes are therefore neither accidental, nor uncoordinated - but is the success of this campaign a positive development, or cause for concern?
Why the Abolition of the Tampon Tax is Bad Policy
The arguments in favour the abolition of the tampon tax are founded on the presumption that exclusion of certain products from full taxation will achieve social and distributional aims. It is argued that it would promote gender equality, and that it would protect lower income women. These are meritorious aims. Yet the key issue is not whether these are aims worth pursuing, but rather whether applying reduced rates of VAT or exemptions to them is the most appropriate instrument to attain them.
There is now an overwhelming body of evidence against the use of exclusions from the VAT base to achieve social and distributional aims. First because, for exclusions from the base to achieve distributional and social aims, the decrease in the tax rate must be passed on to consumers in the form of price reductions. Theoretically this should be (mostly) the case, but there is now a wealth of studies showing that prices tend not to fully reflect reductions in VAT. The risk is therefore that a decrease in taxation of tampons would not result in a full price decrease.
Second, even assuming that the decrease in VAT will affect prices, richer women are much more likely to benefit, than poorer women. The UK Treasury estimates that abolition of the tampon tax will save the average woman only £40 over her lifetime – but even this relatively small amount is not likely to be evenly distributed. Consumption, even of essential items, is overwhelmingly done by the highest income households, so when there is a VAT reduction it is those households that benefit the most.
Third, the costs of reduced rates must also be considered. Tax expenditures resulting from the application of exclusions from the VAT base tend to be extremely significant. HMRC estimates of revenue lost from the abolition of the tampon tax at £47 million over a five-year period, provide a sharp contrast to the small per women average saving.
Finally, there are the significant spillover costs. Most have heard of the (in)famous Jaffa Cakes case, but few realise that this case is just the tip of a very big iceberg of litigation regarding VAT classification problems. Just as few realise that most tax avoidance cases in VAT concern exclusions from the base. This is no accident, and the likelihood that the abolition of tampon taxes will also give rise to litigation is high.
There is therefore a strong – and progressive - case for applying a standard rate of VAT to women's sanitary products, whilst targeting low income households for assistance combating “period poverty”, for example by providing free sanitary products in state schools.
So why is this approach not more widespread?
Why do We Believe the Abolition of the Tampon Tax is Good Policy?
Generally, few non-tax experts care about, or even notice, VAT. Not only are consumption taxes less visible to taxpayers than income taxes, but they are less intuitive. This makes it a particularly fertile ground for manipulation by special interest groups. For industry groups, keen on obtaining tax breaks, a reduction in VAT can bring significant advantages, namely it may mean an increase in profit margins, an increase in the competitiveness for their products, or both.
Of course making the self-interested case for a tax break is unlikely to get attention or yield positive results. Message framing is therefore key. A fairness narrative that concentrates on key policy aims – such as gender equality, protection of the poorest, access to culture and education, or creation of employment, to name a few – and presents reductions in VAT as natural instruments for attaining those aims, feels to most not only reasonable, but indeed intuitive.
Using a fairness-centric narrative is also useful insofar as it disguises groups’ self-interest, and presents wider concerns as the main motivation for the adopted position. Enlisting the assistance of NGOs or pressure groups —sharing with, or even transferring to them the ownership of the narrative—has the potential to increase its political salience, whilst adding legitimacy and credibility to the fairness-centric framing.
This fairness narrative, delivered by the right messengers, also helps thwart opposition: speaking out against the policy instrument, i.e. the tax break, can be easily reframed as opposition to the policy aim – and who would feel comfortable opposing such meritorious aims as gender equality, or protection of the poor?
The instrumentalisation of progressive causes through the construction of fairness-centric narratives, which confuse policy aims – such as gender equality – with policy instruments – VAT reduced rates – should concern us all. Not only because of its costs, but because it opens the door for further tax concessions, with potentially significant distributional impacts, including on the capacity to deliver public services.
It’s therefore time to fight back, and present a counter-narrative of fairness against the erosion of the VAT base. A narrative that focuses not on economic efficiency, but on equity concerns. A narrative centred on the difference between policy aims and policy instruments. A narrative that makes the case against granting tax breaks that overwhelmingly benefit the richest in our societies, at the expense of the poorest. A progressive tax narrative, fit for a post-pandemic world.
This post is based on an article, published in December 2020, in the British Tax Review, entitled “The Impact of Public Perceptions on General Consumption Taxes”. The article provides a detailed, and fully referenced, discussion of the various points raised here.