Taxing sugary drinks invariably hurts the poor
Advocates of sugar taxes have stock responses to these objections. Given the conspicuous failure of food and soft drink taxes to work in the real world, they turn instead to computer models which show that they work in theory. Computer models are only as good as the assumptions fed into them by human beings, however, and since they tend to be created by advocates of sin taxes, they tend to be overly-optimistic while ignoring important substitution effects.
On the question of hammering the poor, campaigners are fighting a uphill battle. Aside from those that are levied on luxuries, indirect taxes are almost invariably regressive. When the targeted product is disproportionately consumed by the poor, they are doubly regressive. That is true of tobacco and it also happens to be true of fizzy drinks.
The standard response to this awkward fact is to redefine what ‘regressive’ means. Campaigners claim that the poor will benefit disproportionately from a tax in health terms because, being poor, they are more price sensitive and will reduce their consumption by a greater proportion than the rich. This is sophistry. ‘Regressive’ has a clear meaning in the dictionary. It means taking a proportionally greater amount of money from those on lower incomes. It has nothing to do with health.
Moreover, it is very doubtful that people on low incomes are more price sensitive when it comes to sinful products. If affordability was the decisive factor, they would already consume fewer sugary drinks than the rich. Instead, they consume more. The same is true of cigarettes. The past fifty years have seen dramatic increases in tobacco taxation. If price rises had the biggest effect on the poor, we would expect smoking to be the preserve of the rich by now. The reality is precisely the other way round. Smoking rates among those who are least able to pay are three times higher than among those with large disposable incomes. Low income smokers have a lower price elasticity than the rich. The same may well be true of drinkers of sugary drinks.
There are several other would-be rebuttals to the regressivity argument. It is sometimes claimed that the impact on the pockets of the poor could be offset by increasing cash benefits, or by subsidising ‘healthy’ food, or by investing money in schemes to educate people on low incomes about eating well. All of these claims are superficially appealing and yet they are flawed. If the government gave people £1 in benefits for every £1 taken in sin taxes, it would defeat the purpose of the tax. The government would effectively be paying people to eat ‘unhealthy’ food. It would also create unnecessary bureaucratic waste as the government takes with one hand and gives with another.
Subsidies for fruit and vegetables sound like an effective, revenue-neutral response. Make the bad food more expensive while making the good food cheaper. The problem is that the government does not control the price of fruit and vegetables and it is difficult to see how a system of subsidies could be introduced without making retailers and producers richer. In practice, it would require a vast system of price controls, surveillance and, again, bureaucracy. Besides, a diet of fruit and veg is already cheaper that a diet of ‘junk food‘.
As for investing the revenue in educational projects, this is the preferred option for many health campaigners although that is hardly surprising when you consider that the kind of people who campaign for these taxes are the kind of people who would be asked to run such campaigns. As Jayson Lusk points out, when it comes to sugary drink taxes the baptists and the bootleggers are often one and the same. Pouring money into ‘education’, ‘advocacy’ and ‘awareness raising’ is just another form of middle class welfare which forces the poor to pay the salaries of wealthy do-gooders.
In an article for the Guardian yesterday, Sarah Wollaston MP added a new argument to the debate. Acknowledging concerns about hitting the poor, she claimed that the sugary drinks tax ‘need not hit the pockets of low-income families as there would always be an alternative, untaxed and cheaper equivalent.’ In effect, she is saying that poor people won’t be hurt by the tax if they do as they’re told and give up sugary drinks. This trivially true. Obviously, if you don’t buy the product, you don’t pay the tax.
But people don’t abandon products en masse for the sake of a 20 per cent tax. We know that demand for fizzy drinks is inelastic (the mean average is 0.79) and we know that the vast majority of consumers will buy them in much the same quantities with or without a tax. With a tax in place, they pay a little more. This creates a deadweight cost that takes a disproportionate share from the pockets of people on low incomes. That is why these types of taxes are – and always will be – regressive.
Christopher Snowdon is the IEA’s Director of Lifestyle Economics. Watch the ieaTV video ‘Sin Taxes‘, which won gold at the 2015 Reason Media Awards.