IEA - Sugar taxes defy basic economics, argues new report

14 Jan 2016 10:12 AM

The evidence for taxing soft drinks - or any other source of calories - as a means of reducing obesity is weak and largely theoretical. In a new briefing from the Institute of Economic Affairs, author Christopher Snowdon uses real-world examples to demonstrate that taxes on sugar are ineffective, regressive, inefficient and unpopular. 

Key findings: 

• Demand for sugary drinks, snacks and fatty foods is inelsatic. People tend to be quite unresponsive to price hikes and do not significantly change their shopping habits.
• Consumers respond by switching to cheaper brands of the product or shopping in cheaper shops.
• This leads to the consumption of potentially inferior goods rather than the consumption of fewer calories.
• Taxes on sugary drinks lead consumers to switch to other high calorie drinks such as fruit juice, milk or alcohol.
• Taxes on energy-dense food and soft drinks take a greater share of income from the poor than the rich. This regressive effect is exacerbated by low-income consumers being less responsive to price changes than the rich.
• No impact on obesity or health outcomes has ever been found. 

The rationale behind a levy on sugary products is underpinned by a belief that instituting a tax would hike prices, leading to fewer sales, fewer calories and therefore less obesity. This model only works, however, if consumers behave as the campaigners want them to, which is far from certain. People respond to incentives, but not always as policymakers would like. 

Why sugar taxes have a neglible impact on consumption

Price inelasticity. Food and drink are cornerstones of household budgets; most people are reluctant to change their weekly food shop unless prices change dramatically. Economic evidence shows that the demand for soft drinks is inelastic, for example:

• In Denmark a 13.1% increase in the price of butter resulting from the Danish fat tax was associated with a modest 5.5% decline in sales
• In Finland, when the price of soft drinks rose by 7.3%, consumption fell by less than 1% 
• In Mexico - the poorest country to have experimented with such a policy - a 10% tax on sugary drinks was associated with a 6% decline in sales, and an average daily decline in consumption of just 36ml per person

Substitution effects. Consumers buy less of the targeted product but more of other high-calorie products. For example, they might consume less cola but buy more fruit juice. Substitution effects can lead to fewer sales of one product without reducing calorie consumption.

Welfare losses. Consumers respond to the tax by switching to cheaper brands or shopping in cheaper brands, suffering a welfare loss from consumption of inferior goods, but not consuming fewer calories. For example:

• In Denmark, consumers responded to the tax on saturated fat by switching to cheaper brands of the same fatty products and shopping in discount stores. Some even began to shop in Germany and Sweden to take advantage of lower prices.

Why sugar taxes have a negligible impact on health

• Sugary drinks provide just 3% of the population’s energy intake in the UK. Given soft drink taxes have only a modest effect on the consumption of a relatively minor source of calories, it should be unsurprising that there is virtually no evidence that sugary drink taxes have reduced obesity anywhere in the world. The European Commission has found that there are ‘as yet no robust conclusions on the impact of food taxes on public health.’
• Any sugar tax would be highly regressive as the poor spend a much higher proportion of their income on the relevant products than the rich.  Even those who believe a sugar tax would ‘work’ by reducing obesity predict they would work least well with people on low income who are least responsive to changes in the price of soft drinks.
• Obese people are also more likely to have price inelastic behaviour. The heaviest consumers tend to be the least responsive to price changes, as with the heaviest consumers of alcohol and tobacco.

Commenting on the report, Chris Snowdon, Head of Lifestyle Economics at the Institute of Economic Affairs, said:

“Lacking any real world evidence that sugar taxes are effective as health measures, campaigners continue to cite findings from crude economic models which fail to account for the ability of consumers to choose cheaper brands, to shop at cheaper shops and to switch to alternative high-calorie food and drink products.

“It’s high time this policy is put to bed. It would hit the poorest the hardest, and the evidence shows it would have little effect on consumption or obesity.”

Notes to Editors:

To arrange an interview with an IEA spokesperson please contact: Stephanie Lis, Director of Communications: 0207 799 8909

The full report, by Christopher Snowdon, can be downloaded here

The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems.

The IEA is a registered educational charity and independent of all political parties