The arrival of a new sugar tax on soft drinks last Friday has been welcomed by many public health bodies. But it has also prompted a flurry of criticism from free-market groups and ordinary consumers, angered at the latest government interference in their eating, drinking and spending habits.
Like any flat tax, the new sugar levy is, by its very nature, regressive. It disproportionately affects the poorest in society, who are most vulnerable to price fluctuations and spend a higher share of their disposable income on soft drinks.
Equally important, however, is the flawed economic logic underpinning sugar taxes. A body of evidence from around the world demonstrates the failure of such policies.
The public health case for the new levy hinges on a chain of assumptions; namely, that taxing high-sugar drinks will stunt sales, which in turn will lead to lower calorie consumption, and, finally, to lower levels of obesity (and better oral health). Yet these assumptions break down very quickly if consumers behave even slightly differently to the way government intends.
This was certainly the case in Denmark, where in 2011 thegovernment implemented a universal tax on fat, operating on very similar assumptions to the sugar levy. This tax applied to all foods with a saturated fat content above 2.3 per cent—ranging from raw ingredients like cheese and butter to pre-prepared foods like pizzas.
Though some Danes did alter their behaviour by switching to low fat alternatives, many more absorbed the costs by making savings elsewhere in their budgets or buying cheaper versions of the same fatty products. Some who lived near the bordereven started to do their grocery shopping internationally, heading to Sweden, Germany and other neighbouring countries that didn't levy a fine on fat. The policy was eventually abandoned after just 15 months, when its unintended consequences became too blatant to ignore.
Studies into sugar taxes mostly find demand for sugary products to be similarly inelastic—unless prices spike dramatically. As the Institute for Economic Affairs’ Christopher Snowdon notes, shoppers tend to be “quite unresponsive to price hikes and do not significantly change their habits,” and when they do switch it is often to “own brand” versions of the same product or shopping in budget stores, as has been observed in countries like Finland and Hungary, which impose “sin taxes” on junk food and sugar.
Other substitution effects are common, whereby consumers switch to sugar-rich products not subject to the tax, or other calorific alternatives. All in all, a levy on soft drinks is a fairly blunt tool for lowering caloric intake when humans are genetically hardwired to seek out energy-dense food andthere are many substitutes to choose from.
For advocates of a sugar tax, the final link in the causal chain is the assumption that reducing access to sugary drinks will lead to lower obesity levels. Yet consumption of sugary drinks has fallen dramatically in recent years (by 45 per cent since 2003), while obesity rates have risen steadily. British shoppers have already been switching to zero sugar substitutes like Pepsi Max and Coke Zero in their millions, without the need for heavy-handed nudge policies. And given that UK consumers derive, on average, less than 3 per cent of their daily calorie intake from sugary drinks, any impact on overall obesity rates (which is, after all, what policy-makers claim to be concerned about) would almost by definition be trivial.
Take Mexico—a nation which has been hauled up as a success story for its 10 per cent tax on sugary drinks, which has been in place since 2014. Even accepting the most generous estimates, and there are reasons to be sceptical, the sugar tax in Mexico is believed to have reduced sales of sugary drinks by about 6 per cent. This amounts to an average decrease in calorie intake of just 16 calories—a drop in the ocean, by any estimates.
Sin taxes on sugary drinks are nothing new, and we have numerous case studies to highlight their failure. But in terms of achieving the stated aim—making people slimmer—the policy has never worked anywhere it’s been tried.