To tax or not
to tax, that is the question.
David Cameron
is facing increased demand from Jamie Oliver and his supporters to levy a
‘sugar tax’ on sugary drinks. Public Health England also released their report
last week, outlining their aims for reducing obesity, and a sugar tax was among
one of the top measures to be highlighted.
But, from an
economic standpoint, is this a viable policy?
Market Failure
A sugar tax
is needed in order to fix the market failure in the sugary drinks market.
Sugary drinks can be considered as a demerit good as they have extremely high
private costs as well as even higher social costs. Overconsumption of sugar
leads to addiction and ‘sugar highs’, the result being a decline in energy when
the ‘slump’ sets in. It is a contributory factor towards Type 2 diabetes, the
deterioration of tooth enamel, as well as obesity. This thus leads to higher
costs on the NHS, reduces working hours, and so presents a welfare loss to
society. It could also reduce worker productivity, as workers are ill, with Elga Bartsch,
Morgan Stanley’s Global Co-Head of Economics commenting that at the current
rate, diabetes-related illnesses would reduce real GDP growth to 1.8pc for the
next 20 years. Sugary drinks are overproduced as suppliers ignore the negative
externalities. A Pigouvian tax would increase the price of the drink and may
decrease demand for sugary drinks. This is turn may increase incentives for consumers
to purchase cheaper drinks, which have superior health benefits, such as water
or ‘no added sugar’ fruit juices, thus reducing obesity, benefiting the
consumer and the public at large who have to fund the NHS.
Moreover, it
has been estimated that a 20pc sugar tax would raise government revenue by up
to £1 bn a year. This money could be used to raise awareness of the dangers of
overconsumption of sugar as well as helping those affected by Type 2 diabetes,
obesity and sugar related illnesses.
Unemployment and Greater Inequality
However, the
Chairman of Wetherspoon pubs, Tim Martin, has voiced his opinion, stating that
the sugar tax would “close pubs”and lead to job losses as drinks would become so expensive that
customers decide to dine less frequently. However, Martin’s argument has little
substance. It seems highly unlikely that customers would stop eating out
outright due to a slight increase in the price of their beverages. Indeed,
there are other, cheaper, non-sugary drinks to choose from, should customers
decide that their preferred option is now too expensive. Moreover, even if
Martin’s prophecy were to come true, (an extremely unlikely event), resources
and employment would shift to wherever the increased government revenue was
spent, hopefully increasing education and medical treatments, as advocated
earlier.
A prominent
argument is that the sugar tax would be regressive, because it would affect
those on lower incomes more so than those on higher incomes. However, it is
important to note that the tax is not on all drinks, and people have the option
of a wide range of other beverages to choose from. Moreover, the increased
government revenue would be used on health care, and this would benefit those
on lower incomes, who are more reliant on public health care than those with
higher incomes and can afford private health care costs.
The Market's Reaction
Notwithstanding,
the question remains, would the tax be effective? Despite the purported
benefits of a sugar tax, it is hard to imagine that a tax on sugary drinks
would significantly reduce sugar intake to decrease levels of obesity. Marlow
states that, “Tax advocates claim that soda consumption causes obesity, but
evidence demonstrating this casual link is weak at best.” Indeed, obesity and Type
2 diabetes are multifactorial conditions, resulting not only from unbalanced
diets, but from a lack of exercise, genetics and age also. Sugary drinks only
make up a part of unbalanced diets, which in turn is only one cause of obesity.
We cannot hope that a sugar tax would solve the problem of obesity.
Even if
sugary drinks were the most significant cause of obesity and Type 2, which they
are not, we cannot foretell the market’s reaction to such a sugar tax. A
similar tax in California was levied a year ago, but with limited success. Coke
and Pepsi only passed on 22pc of the tax onto consumers, absorbing the rest.
Therefore, the tax had a minimal impact on consumers’ buying decisions.
Moreover, the
type of tax will affect consumers’ reactions. An ad valorem tax, a tax which is
added in proportion to the drink’s base price, may mean that consumers buy more
sugary drinks, the opposite of what Oliver wants to occur. Buying sugary drinks
in packets is cheaper than buying single sugary drinks. Therefore, an ad
valorem tax would only make the single sugary drink more expensive relative to
a packet of sugary drinks, and so this would only act as an incentive for more
consumers to purchase sugary drinks in bulk, increasing their intake of sugar.
Furthermore, an excise tax, which is based on the volume of the good being
bought, may also result in consumers increasing their intake of sugar, as they
revert to brands with more sugar in their drinks so that they get the most out
of their money. Despite his best intentions, it seems unlikely that Oliver’s
tax would stop us from gravitating towards sugar drinks!
Freedom to Choose
Imposing a
tax on sugary drinks, as well as having unwanted effects and having limited
impact on our health, would also limit our freedom to choose the lives that we
want to lead. Instead, we should focus on promoting healthy, balanced
lifestyles, informing people of the dangers of the overconsumption of sugar,
but ultimately letting them choose. Indeed, encouragement, not restraint,
produces longer term results. The government should aim to target greater
education in schools, limit the advertising of sugary foods and encourage food
producers to reduce the excess, unnecessary sugar in food. They should aim to
promote and increase levels of physical activity, such as creating more cycle
friendly routes, helping people to develop their own fitness regimes, rather
than focusing on a factor such as sugary drinks which has limited effects on
our health relative to a lack of physical exercise. Take Mexico City. There are
30 machines installed at subway stations throughout the city that give a free
ticket to anyone who performs 10 squats, thus helping to promote greater physical activity.
Moreover, from December this year, New York City is introducing ‘salt shaker’
icons on menus to alert customers of meals which contain more than an adult’s
daily allowance of sodium. We should look at these initiatives and implement some of our own,
encouraging the public to be more aware of the decisions that they are making,
but ultimately letting them choose.
The verdict?
A sugar tax seems unlikely to be passed. For all his best intentions, Jamie
Oliver is focusing too much attention on a small factor which contributes to
obesity. Instead, we need to focus on encouraging, not forcing, people to adopt
healthier lifestyles, through advertising and campaigns, and looking towards
targeting much larger factors, namely physical exercise, in order to bring
about more drastic results.
Update:
A recent article from The Economist suggests
that a ‘sugar tax’ on soft drinks may in fact decrease sales of these drinks.
Indeed, Mexico introduced a ‘soda tax’ at the beginning of 2014, charging 1
peso per litre of fizzy pop. However, it is important to note that
manufacturers increased the price of these drinks by more than 30pc of the real
value of the tax. The graph below highlights that soon after the introduction
of the tax the sales of fizzy drinks fell by 1.9pc, following an increase of
3.2pc over the three years before the introduction of the tax. Moreover, the
graph highlights that the consumption of bottled water increased by 5.2pc in
2014, perhaps suggesting that Mexican citizens switched to soda’s substitute-
bottled water.
Moreover, the University of North Carolina’s
Barry Popkin has stated that citizens on low-incomes have reduced their
consumption of fizzy drinks by 17pc, meaning that they have gained greater
benefits than the ‘average’ citizen and this is important because they have less
access to health facilities in America.
Although it is clear that sales of fizzy
drinks decreased in Mexico following the introduction of the tax, this is not
to say that this has helped to decrease obesity or has dramatically benefited
citizens’ health. Indeed, it has been estimated that Mexican citizens have
reduced their calorie intake only by 5 calories due to the introduction of the
tax. Moreover, research has highlighted that a large tax on sugary drinks is
needed in order to have even a slight impact on the sales of fizzy drinks. Governments,
if implementing the tax, should also ensure that they are able to tax on the
amount of sugar in the drink, thus inducing manufacturers to decrease their
addition to ‘extra’ sugar. For example, in France, taxes on sugary drinks carry
a flat rate meaning that manufacturers have little incentive to reduce the
amount of sugar added to the drinks. However,
in Hungary, the tax levied is dependent on the amount of sugar added to the
drink. Research has highlighted that due t this, 40pc of manufacturers reduced
their addition of sugar in order to avoid increasing the price of their drinks
and thus reducing demand and revenue.
References
