The government’s case hinges on a set of assumptions, each deeply flawedby Madeline Grant / April 10, 2018 / Leave a comment
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…