A growing number of jurisdictions have adopted taxes on sugary drinks to help combat excessive sugar consumption. New research by Pierre Dubois, Rachel Griffith and Martin O''Connell simulates the introduction of a volumetric tax on sugary soda in Britain to examine how well targeted such taxes are.
The findings, to be presented at the Royal Economic Society''s annual conference at the University of Sussex in Brighton in March 2018, show that the simulated tax leads young people to reduce the amount of sugar they purchase via soda by around 80% more than the average consumer, but it is less effective at targeting people with a high-sugar diet.
Corrective taxes have traditionally been applied to alcohol, tobacco, and gambling. Recently, there has been a drive to extend them to cover some types of foods, with soda taxes being at the vanguard of this move.
The principal economic rationale for such taxes is that they discourage consumption that generates costs not taken into account by individuals at the point of consumption. In the case of sugar, there is clear medical evidence that excess consumption can lead to large future costs, while almost all individuals exceed official recommendations on how much to consume.
It is plausible that, at least for some consumers, these health costs are not factored in at the point of consumption. This is most obviously true for children, but is also likely to be the case for some individuals with high total dietary sugar and who therefore are at elevated risk of suffering health problems.
The efficacy of a soda tax relies on the extent to which it can encourage these groups to avoid internalities and at what cost to consumers in terms of welfare loss associated with higher prices.
The results of the new study show that the tax would succeed in achieving relatively large reductions in sugar among young consumers. But the young also lose out most in terms of direct consumer surplus loss due to higher prices. The relatively large internalities some young people impose on themselves make it likely that the gain from averted internalities will outweigh this.
The performance of the tax in terms of reducing the sugar intake of those with the most sugary diets is less good – those with high total dietary sugar are relatively price inelastic and therefore fail to lower their sugar consumption in response to the tax by more than more moderate sugar consumers. Nevertheless, if internalities are sufficiently convex in total sugar, this group may still benefit from the tax.
The redistributive properties of the tax are more attractive than one based purely on traditional economic tax incidence. While the traditional economic burden of the tax falls disproportionately on the poor, the poor also lower their sugar consumption by a relatively large amount and therefore are likely to benefit by more than better off consumers due to averted internalities.