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BURNING ISSUE: Tobacco is one of the main targets of governments’ sin tax policies. Picture: THINKSTOCK

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IS IT time to rethink the way we tax sin? The UK has long levied special taxes — "duties" — on products that pollute the environment, the lungs, the liver or the pocketbook: driving, flying, tobacco, alcohol and gambling.

There are good reasons for the taxes. The government must raise revenue somehow, so there is much to be said for taxing products that are price-insensitive, socially harmful or, at the very least, unhealthy temptations.

But the way sin taxes are levied in practice is an incoherent muddle. Plenty of products that are bad for us (bacon, butter, sugar) get favourable tax treatment, attracting no value-added tax (VAT), although the standard VAT rate is 20%. Heating and lighting our homes also attracts a concessional rate of tax, although a kilogram of carbon dioxide emitted from a power station or a gas boiler contributes to climate change just as much as a kilogram emitted from a car. Vehicle excise duty is a tax not on driving, but on owning a car. And the rate of duty on alcohol varies depending on how we drink it.

It is easy to see how successive UK chancellors bodged their way to this point. Now, incumbent George Osborne has an opportunity to fix the situation during his budget speech today.

Here is what he should do.

First, similar harms should attract similar taxes. The UK duty on 10ml of pure alcohol, about the amount in a shot of vodka or half-a-pint of beer, varies wildly. It is about 7p in strong cider, 18p in strong beer, or 28p in whisky and wine. A consistent price per millilitre would make more sense.

Second, he should broaden the sin tax base. UK duties are concentrated on tobacco, motor fuel and alcohol. As the Institute for Fiscal Studies showed in its "green budget" last month, revenue from duties has been falling from 4.1% of national income in the early ’80s, to 2.6% last year. The drop is the net result of falling duties on fuel, declining duties on alcohol, and lower tobacco and alcohol consumption.

Should the chancellor, then, raise duties? A wiser approach is to tax sins that have thus far escaped attention. The most obvious is congestion: fuel taxes do not distinguish between driving along an uncongested country road and driving in rush-hour in a built-up area, which causes vastly more social harm. Congestion charges, which are now technically feasible, are fair and efficient, if the political case can be made.

Another obvious sin is sugar. While one can be too puritanical about nudging people to take care of their health, it seems strange that activities such as buying a T-shirt or earning a living attract tax, while sugar is tax-free.

A sugar tax of a half-penny a gram would add about 18p to the cost of a can of Coke.

Third, Mr Osborne should avoid arbitrary cut-offs where possible. In a bygone age, it must have been simpler to slap a tax on an item in a particular category, but this has led to the infamous Jaffa Cake problem. Are Jaffa Cakes — sponge discs with an orange jelly topping, partly coated in chocolate — cakes (zero VAT) or biscuits (VAT at 20%)?

A tribunal in 1991 mused that Jaffa Cakes are packaged much like biscuits, are sold next to biscuits and are the same size and shape. But it concluded that Jaffa Cakes are cakes, and thus they remain tax-advantaged.

In discouraging unhealthy eating, the relevant issue should be how much sugar, salt and saturated fat a product contains.

Sugar can be measured and taxed by the gram, whether it comes dissolved in soft drinks or added to bread or anything else.

There are better ways to deal with inequality than by cutting sin taxes. People on low incomes need support, but that help is better provided through tax credits, child benefits or good public services than cheap booze, sweets and tobacco.

Trying to make vodka and cigarettes cheaper would be a strange way to tackle social injustice.

Financial Times