Rationale for introducing sugar tax

Excessive sugar intake is associated several health hazard such as diabetes, obesity, tooth decay and such others. Unrestricted consumption of sugar inflicts cost on individual in terms of lowering life expectancy. The cost not only limited to individual but also an external cost is borne by the society. Society bears a cost in forms of a higher cost of health care and lower productivity. A sugar tax is introduced to reduce consumption of sugar as a tax is expected to discourage consumption (Tselengidis and Ostergren 2018). The revenue collected from the tax can further be used for funding health care service. The case study discusses economic arguments for introducing a sugar tax.

Implementation of a sugar tax is based on several economic rationales. The main arguments in favor of sugar tax are given as follows

Sugar sweetened drinks have an external cost on the society. The excessive consumption of sugar lead to several health problems including Diabetes particularly type 2 diabetes, obesity and other illness related with obesity like heart diseases, back pain and tooth decay mostly prevalent among people. External cost from overconsumption of sugar sweetened beverages is reflected from a higher public expenditure for health care. The poor health condition adversely affects productivity of workers (Backholer and Martin 2017). The social marginal cost of sugar consumption thus exceeds that of the private marginal cost. The effect of a higher social marginal cost is illustrated in the following figure.

Figure 1: Effect of external cost

(Source: as created by Author)

Equilibrium under free market occurs at the point E. The acquired free market equilibrium occurs where private marginal cost meets with private marginal benefit. Now, with external cost, social marginal cost is higher than private marginal cost. The socially efficient equilibrium point is thus different from private market equilibrium. Socially efficient equilibrium point is at E_1, obtained from the intersection of social marginal cost and social marginal benefit (Baumol and Blinder 2015). In an unregulated condition, market thus is overproduced. A tax equivalent to the external cost thus needs to be imposed to internalize the externality and ensure socially efficient outcome.

Sugar drinks are classified as demerit goods. Demerit good is one, that an adverse external effect on consumers but the damaging effect are ignored or unknown to the consumers. Sugary drinks are considered as demerit good as such people might be unaware regarding the harmful personal cost involved in consumption of sugar (Houghton and Houghton 2018). Alternatively, it is also possible that people are aware of harmful consequences of sugar but are unable to lower consumption of sugar followed by its addictive nature. In terms of sugar consumption, Australia is one of nations having a very high sugar intake on an average. Australians on an average consume 60 grams of sugar each day which is equivalent to 14 teaspoons of white sugar (Burrell 2016). People often take sugary drinks or food without knowing how much sugar is in the drink or the processed food. Lack of awareness of harmful consequences of sugar drinks is known as information failure. This is a problem in market economies, where consumers do not have full information to make a choice.

External cost

Imposition of tax is associated with a benefit of raising the collected tax revenue for the government. The added revenue can be used to fund public heath expenditure or in other social welfare program (Purtle, Langellier and Le-Scherban 2018).

A tax on sugar provides incentive to suppliers to supply some healthier alternatives. When suppliers have an incentive to lower the supply of sugary drink and promote some healthy alternatives, then buyers need to follow the trend in supply (Long et al. 2015). The effort of suppliers and consumers jointly reduce consumption.

Besides positive arguments in favor of a sugar tax, some economists also provide arguments against imposition of such tax.

The sugar tax affects disproportionately low income groups. A study based on Australia suggests that yearly spending on sugary drinks under a tax of 20 percent averaged at $30 per person. However, those belong to the lower socioeconomic groups pay $5 more a year compared to richer group in the society (Davey 2018). The sugar tax is thus regressive in nature as it imposes a higher burden on poor people.

As the sugar tax reduces supply of sugary drinks, it causes many people to loss their job in the industry. The Australia Beverages Council has reported that tax on sugar has little to do with reducing obesity (Sharma et al. 2014). Rather it costs jobs which is again a frightening message to the politicians. Politicians in Australia thus opposes a tax on sugar or sugar sweetened beverages to reduce consumption of sugar.

Campaigners suggest policies other than taxes are more effective means of reducing sugar consumption. These policies include banning of advertising at the Children and education initiatives. A combination of tax, advertisement ban and education is the most efficient strategy for controlling sugar consumption.

Figure 2: Impact of a tax on sugar

(Source: as created by Author)

The demand in the sugar market is given by the downward sloping line DD. The corresponding supply curve is show as the upward sloping line SS. Without tax equilibrium is obtained at E. Now considered a tax of rate t is introduced. The tax would shift the supply curve inward to S₁S₁ by the amount of tax. In case of indirect tax, the burden of taxation is shared both by buyers and sellers. The tax creates a difference between the price paid by buyers and price that sellers receive (Friedman 2017). Before tax, price in the market was P*. Tax raises the price that buyers pay to P_1. The higher price induces buyers to reduce the demand for sugary drinks. Sellers however receive a lower price compared to pre-tax. Price to the sellers reduce to P_2. The lower price lowers the profitability of suppliers. Both buyers and sellers receive a lower surplus compared to pre-tax situation. Revenue to the government from the imposed tax is given as P₁P₂FG. Portion of revenue contributed by the buyers is P₁P*E₁F. Part of revenue contributed by the sellers is P₂P*E₁G. Quantity in the market reduces from Q* to Q_1.  The imposed tax though reduces sugar consumed in the market, society however suffers a welfare loss called dead weight loss indicated by the triangle EFG.

Conclusion 

The discussion leads the conclusion that, a strong economic, personal and political benefit exist from implementation of sugar tax. The imposed tax encourages a healthier diet. The tax at the same time increases revenue to fund health costs for obesity and other health hazards results from excess consumption of sugar. The arguments however are counter attacked by some opponents. There is a potential job loss in the soft drink industry that experienced a decline in demand. Another vulnerable group to sugar tax is the poorer section of the society who ended with paying a relatively higher share of tax.

References

Backholer, Kathryn, and Jane Martin. “Sugar-sweetened beverage tax: the inconvenient truths.” Public health nutrition20, no. 18 (2017): 3225-3227.

Baumol, William J., and Alan S. Blinder. Microeconomics: Principles and policy. Nelson Education, 2015.

Burrell, Susie. 2016. “New ABS Data Reveals How Much Sugar Australians Really Consume”. Newscomau. https://www.news.com.au/lifestyle/health/diet/new-abs-data-reveals-how-much-sugar-australians-really-consume/news-story/979263910569a4c55bb0051551bdce1a.

Davey, Melissa. 2018. “Sugar Tax: Why Health Experts Want It But Politicians And Industry Are Resisting”. The Guardian. https://www.theguardian.com/australia-news/2018/jan/10/sugar-tax-why-health-experts-want-it-but-politicians-and-industry-are-resisting.

Friedman, Lee S. The microeconomics of public policy analysis. Princeton University Press, 2017.

Houghton, Frank, and Sharon Houghton. “Ireland’s new sugar tax: a step in the right direction.” The New Zealand Medical Journal 131, no. 1470 (2018): 97-98.

Long, Michael W., Steven L. Gortmaker, Zachary J. Ward, Stephen C. Resch, Marj L. Moodie, Gary Sacks, Boyd A. Swinburn, Rob C. Carter, and Y. Claire Wang. “Cost effectiveness of a sugar-sweetened beverage excise tax in the US.” American journal of preventive medicine 49, no. 1 (2015): 112-123.

Purtle, Jonathan, Brent Langellier, and Félice Lê-Scherban. “A case study of the Philadelphia sugar-sweetened beverage tax policymaking process: implications for policy development and advocacy.” Journal of Public Health Management and Practice24, no. 1 (2018): 4-8.

Sharma, Anurag, Katharina Hauck, Bruce Hollingsworth, and Luigi Siciliani. “The effects of taxing sugar?sweetened beverages across different income groups.” Health economics23, no. 9 (2014): 1159-1184.

Tselengidis, Arsenios, and Per-Olof Östergren. “Lobbying against sugar taxation in the European Union: Analysing the lobbying arguments and tactics of stakeholders in the food and drink industries.” Scandinavian journal of public health (2018): 1403494818787102.