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Hitting The Poor, Why Sugar And Soda Taxes ‘Defy Basic Economics’

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Guy Bentley Research Associate, Reason Foundation
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Sugar taxes are inefficient and hit the poor hardest, according to a research note from the U.K.’s Institute of Economic Affairs (IEA).

The chorus of voices supporting taxes on sugary products is growing. From celebrity chefs to doctors to policymakers, all see tax increases as a route to reduce sugar consumption and thereby curb obesity rates.

Both real world evidence and economic theory make a mockery of the notion that taxes suffice to substantially tackle obesity, says the IEA’s head of lifestyle economics, Christopher Snowdon.

One of the key reasons sugar taxes don’t work is that the demand for sugar-filled drinks and fatty foods tend to be inelastic – meaning people continue to buy the products in large amounts despite the higher price.

Even if people were to change their behavior in response to higher taxes, consumers will often just switch to cheaper brands or buy their groceries from cheaper shops. “This leads to the consumption of inferior goods rather than the consumption of fewer calories,” says Snowdon.

The IEA points to the example of Denmark’s so-called “fat tax,” which was introduced in October 2011. The tax proved so ineffective, with people switching to cheaper brands or buying the products they preferred from across the border, that it was repealed in January 2013. The tax was also hugely unpopular.

A tricky problem for politicians hoping to introduce similar taxes in the U.S. is the poor spend a greater share of their income in the bare necessities, any taxes targeting these goods will have a disproportionate impact on the poor.

The IEA’s previous work on “sin taxes” shows the poorest 20 percent of households spend roughly $2,000 per year on sin taxes, amounting to around 11.4 percent of their disposable income.

Poor British households spend almost 40 percent of their disposable income on sin taxes and consumption taxes, compared to households in the top 20 percent who spend just 15 percent.
(RELATED: Sin Taxes, Zoning Laws And Occupational Licensing Are Holding Back The Poor)

But leaving aside the harm done to poor pockets, sugar taxes may not even have an impact on people’s health. “No impact on obesity or health outcomes has ever been found,” Snowdon writes. “Early evidence from Mexico suggests that a ten percent tax on sugary drinks led to an average daily decline in consumption of 36ml per person.”

“As Tom Sanders, a professor of nutrition and dietetics, notes, this is the equivalent of 16 calories and is ‘a drop in the caloric ocean. Long-term reductions in total energy in the range of 300-500 kcal/d are probably needed to prevent obesity.'”

Snowdon concludes by citing a systematic review of 880 studies that found “the public health case for using economic instruments to promote dietary and physical activity behaviour change may be less compelling than some proponents have claimed.”

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