The Sugar Tax

Over the last few decades, the prevalence of health conditions such as obesity have increased
dramatically. For instance, the number of overweight or obese young children increased by 9
million globally from 1990 to 2016 (World Health Organization, 2019). Sugar is thought to be
largely responsible for these conditions due to the fact that it can be rapidly metabolised from
readily available products like soft drinks. Consequently, there has been mounting pressure on
policymakers to introduce effective policies to improve population health and sugar tax has
been a response. In this brief, the economics of the sugar tax will be investigated from the
theory to the evidence. This will provide an insight into the effectiveness of the tax and
therefore, the policies that should be further implemented.

Negative Externalities from Consumption of The Effect of Indirect Taxation on Sugar -

Sugar-Sweetened Beverages (SSB’s) Sweetened Beverages (SSB’s)

Price of Price of 𝑆 !"#

SSB’s S SSB’s S
𝑃!"#
Welfare loss
𝑃∗ 𝑃∗

𝑃$ 𝑃$

D = MPB D = MPB
MSB MSB
𝑄$ 𝑄∗ Quantity 𝑄$ 𝑄∗ Quantity
of SSB’s of SSB’s

The main economic theory underpinning the sugar tax is the market failure associated with the
sugar consumption. This can be illustrated by the example of sugar-sweetened beverages
(SSB’s). An individual’s consumption of SSB’s can lead to health problems such as diabetes.
However, this also affects third parties as pressure is on healthcare services to treat these
problems. As a result, negative externalities occur for society in the form of higher taxes or
higher healthcare premiums. Consumers could underestimate the negative externalities of
unhealthy sugar consumption due to a lack of information. This can cause overconsumption and
hence welfare loss as demonstrated by the left graph above. In theory, this could be addressed
by indirect taxation. The graph to the right shows that taxation on SSB’s raises the price from 𝑃∗
to 𝑃"#$ . Then the quantity of SSB’s consumed drops from 𝑄∗ to the socially optimum level of
𝑄 % . Therefore, sugar tax may reduce the sugar consumption which in turn reduces the burden
on society.

Evidence supports that sugar tax on a product does reduce the consumption of that specific
product. For instance, soft drink taxes in Philadelphia led to a 34% increase in price and 46%
decrease in purchases of soft drinks within Philadelphia (Seiler et al., cited in Griffith, et al.,
2019) However, once cross-border purchases were taken into account consumption only fell by
22% in total in Philadelphia (Seiler et al., cited in Griffith, et al., 2019). It shows that cross-border
shopping diminishes the positive impacts of sugar taxing. Supporting this, is the fact that soft
drink taxes led to reduction in purchases in all jurisdictions except Berkeley where it’s easy to
engage in cross-border shopping. Therefore, governments in each jurisdiction should consider a
policy that prevents cross-border shopping such as ensuring that the tax covers a large
geographical area. Philadelphia had the largest decline in soft drink consumption due to having
a higher relative tax rate compared to other jurisdictions (Griffith, et al., 2019). This implies that
higher taxes generate the greatest declines in consumption so policymakers should consider
implementing higher taxes to see greater benefits.

Another theory behind sugar tax is that it may incentivise consumers to switch to healthier
untaxed substitutes. In the year following the introduction of tax on SSB’s in Mexico, it was
found that there was a 7.3% decrease in per capita sales of SSB’s while there was a 5.2%
increase in per capita sales of water (Colchero, et al., 2016). Despite the fact that this evidence
suggests consumers switch healthier alternatives (e.g. water), it could possibly only paint half of
the picture. A limitation of the tax is that consumers could be switching to equally or more
unhealthy untaxed substitutes like confectionary or crisps. Furthermore, researchers have found
that individuals can experience a ‘sugar-fat seesaw’ where if they can’t receive sugar, they
compensate by increasing fat intake which is also potentially dangerous (Sadler, et al., 2014). A
potential policy could be to tax all potentially harmful basic ingredients (e.g. sugar and fat) in
every nutrient-poor product.

A further indication from economic theory is that if the taxed product has an elastic demand
then producers bear more of the burden than consumers whereas if the demand is inelastic
then the opposite occurs. The majority of studies from an IFS review showed that the estimated
pass-through of the soft drink tax to the price was full or near to full (Griffith, et al., 2019). This
finding argues that the demand for sugary drinks is inelastic as consumers bear all or almost all
the burden. Furthermore, evidence shows sugary drink consumers are more likely to be from
low-income groups than a higher income groups so this tax could be seen as regressive as low-
income households would bear more of the tax burden (Cawley, et al., 2019). However, the tax
maybe more progressive in terms of health since diabetes and obesity are more prevalent in
low-income households (Cawley, et al., 2019). A health benefit for low-income consumers is
that evidence shows the tax has caused the healthy reformulation of existing sugary drinks such
as in the UK following the soft drink levy announcement (Scarborough, et al., 2020). A potential
policy to outweigh the financial disadvantage of the tax on low-income groups could be
directing tax revenue to fund nutrition programs specifically in these communities.

Finally, economic theory states that corrective taxes should be proportional to the harm caused
which in this case is amount of sugar. A US analysis estimates that taxing according to sugar
content rather than volumetrically would cause US adults to consume 2.3 grams less sugar per
day and would generate $400 million more revenue (Harvard T.H Chan School, 2019). Therefore,
policymakers should consider taxing according to amount of sugar rather than liquid volume as
it brings better health and economic benefits.

To conclude, this brief has highlighted evidence which agrees with the main cases for sugar tax
enactment including reduction in consumption of the tax product, reformulation and hence,
health benefits. On the other hand, it has drawn attention to the shortfalls of the tax including
cross-border shopping, possible unhealthy substitution and volumetric taxing. Alongside this, it
has suggested policies to combat these shortfalls such as taxing larger geographical areas, taxing
fat as well as sugar and taxing according to sugar content. Some limitations to the evidence
available are that the direct long-term health impacts of sugar tax are too early to be recorded
(e.g. obesity rates) and how it affects the consumption of other unhealthy substitutes.
Bibliography

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Griffith, R., O'Connell, M., Smith, K. & Stroud, R., 2019. The evidence on the effects of soft
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