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The Sugar Tax: ECN105 Contemporary Economic Issues

The lecture discusses the sugar tax, including the case for it due to negative externalities of sugar consumption. It examines who bears the burden of the tax, whether it is regressive or progressive, and other challenges. It also covers designing an effective sugar tax, suggesting it should be proportional to the harm caused by varying sugar content in drinks.

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Harry Singh
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38 views

The Sugar Tax: ECN105 Contemporary Economic Issues

The lecture discusses the sugar tax, including the case for it due to negative externalities of sugar consumption. It examines who bears the burden of the tax, whether it is regressive or progressive, and other challenges. It also covers designing an effective sugar tax, suggesting it should be proportional to the harm caused by varying sugar content in drinks.

Uploaded by

Harry Singh
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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ECN105 Contemporary Economic Issues

Lecture 8

The Sugar Tax


Lecture plan

• The case for a sugar tax


• The economics of the sugar tax: externalities
• Who pays for the tax?
• Regressive or progressive tax?
• Other issues with the sugar tax
• Designing the sugar tax
The case for the sugar tax
The case for the sugar tax
• Externality and Market Failure: the external cost of sugar consumption
• Excessive consumption of sugar is linked to various illnesses whose treatment puts
pressure on the health service and costs to society
• Information Failure or Myopic Behaviour
• Consumers lack information about the addictive nature of sugary drinks or act
myopically underestimating its addiction and consequences
• Sugar Tax as Revenues for Social Good
• The revenues from the sugar tax can be earmarked for projects aimed at improving
individuals’ wellbeing e.g. funding for school sport, awareness campaigns etc.
• Product Reformulation
• The sugar tax can provide incentives to manufacturers to change the soft drinks’
formula and reduce their sugar content
Negative Externality from Consumption
Price of Soft Drinks

S
When consumption of a
product or service reduces
the benefit enjoyed by other
individuals, the benefits to
Welfare loss
P society are lower than the
benefits enjoyed by the
actual consumers of the
Ps product/service. Negative
consumption externalities
lead to sub-optimal over-
D = MPB consumption and, hence,
over-production

MSB

Qs Q Quantity of Soft Drinks


The Sugar Tax
Addressing the externality through indirect taxation
Stax
Price of Soft Drinks

The socially optimum


Ptax consumption level could be
achieved by imposing a tax per
P unit of product/service
consumed. A well designed
and calibrated tax could
Ps increase the price to the level
where the socially optimum
level of output is consumed.
D = MPB

MSB

Qs Q Quantity of Soft Drinks


Who actually pays for the sugar tax?
Who pays for the tax?
Stax
Price of Soft Drinks

With an elastic demand,


Tax paid by represented by a flatter
consumers demand curve, consumers will
react strongly to the increase
Ptax in price set by tax by reducing
their consumption by a large
P amount. With ‘price elastic’
consumers the burden of the
tax falls proportionally more
P1 on producers than on
Tax paid by D consumers.
producers

Qs Q Quantity of Soft Drinks


Who pays for the tax?
Stax
Price of Soft Drinks

With an inelastic demand,


Tax paid by
represented by a steeper
Ptax consumers
demand curve, consumers will
react to the increase in price
set by tax with a relatively
small reduction in
P consumption. With ‘price
P1 inelastic’ consumers the
burden of the tax falls
Tax paid by proportionally more on
producers consumers than on producers.
D

Qs Q Quantity of Soft Drinks


The challenges to the sugar tax
Regressive and Progressive?
• Regressive tax
• A regressive tax takes a higher percentage of tax revenue from those of low
incomes
• As income increases the proportion of income paid in tax falls
• Is the Sugar Tax a regressive tax?
• The argument is that lower Socio Economic Position (SEP) groups consume
disproportionally larger quantities of sugar-sweetened beverages relative to
higher SEP groups
• Moreover it is argued that the demand for sugary drinks is inelastic
• Hence the claim is that the Sugar Tax is regressive since lower SEP groups pay
more tax than the higher SEP groups
• Does the Sugar Tax have ‘progressive health benefits’
• The argument is that the Sugar Tax disproportionally benefits the poor and would
be progressive in health
Regressive and Progressive?

• Does the Sugar Tax have ‘progressive health benefits’


• The argument is that the Sugar Tax disproportionally benefits the poor and would
be progressive in health
• According to the Faculty of Public Health (2016)
• “If you apply a sugary drinks tax across the board and everybody consumes 10%
less, that produces a 1% reduction in disease overall. But in poorer areas that
would be a three-times-bigger reduction compared with more affluent areas,
because poorer people are two to three times more likely to get heart disease,
diabetes, obesity, cancer or to have a stroke.”
Regressive and Progressive? – Some evidence

Based on the available evidence, a tax on SSB:


• Will deliver similar population weight benefits across socio-economic strata or greater
benefits for lower SEP groups
• An SSB tax is shown to be consistently financially regressive, but to a small degree.
Other Sugar Tax Challenges

• Alternative policies to a tax


• Perhaps regulation or ‘nudging’ policies could be more effective in reducing sugar
consumption
• Substitution
• With soft drinks taxed, consumers might simply switch to alternative products to
get the ‘sugar fix’
• Business Cost
• The fall in demand might put at risks jobs in manufacturing, distribution and
retailing
Designing the sugar tax
Designing the sugar tax

• A basic economic principle is such that corrective taxes should be proportional to the
harm caused;
• The harm from sugary drinks comes from the sugar, and SSBs vary substantially in
sugar per unit volume;
• SSB taxes typically set constant rates per unit volume i.e. pence per litre
• However, is this an appropriate tax design?
Designing the sugar tax

• A tax acts as a signalling device, increasing consumers’ awareness and alerting them
to the dangers of overconsumption, which they might otherwise ignore. It increases
the effect of complementary policies such as health education.
• The best form of the tax is to follow the approach taken in the United Kingdom and
Ireland which translate into ad valorem equivalents of 20 per cent and 40 per cent
respectively of the wholesale pre-tax price.
The sugar tax worldwide
The UK Sugar Tax
Let’s have a closer look at the UK Sugar Tax….
Readings

Econ CORE – Unit 12.1 to 12.4 and 12.9


Please be aware that this unit deals with the general issue of market failure
and externalities

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