Economics of Taxation: Sweetened Beverage Tax

Taxes are integral part of financial systems in most countries, they help to regulate the local and national budgets and manufacturing and sales of various products. A soda tax or sugary drink tax was worked out in order to regulate the consumption of drinks with added sugar. The drinks, which are covered by this tax, include sports drinks, carbonated soft drinks, energy drinks. Designing of this tax caused a lot of controversies in many countries, certainly the producers of these drinks do oppose its application in practice. The key advocates of sugary drink tax are the World Heath Organization, considering this tax to be an example of Pigovian tax. Their experts explain the need of this tax for reduction of the economic costs of obesity and the policy to discourage unhealthy diets.

The major reason for working out sugary drink tax is said to be the concern about public health, namely about diabetes and obesity. In many developed countries diabetes becomes a serious health concern, as statistically it caused 1.5 million deaths annually. The fact is that sugar from drinks enters human organism quicker, than from food. This leads to overloading of the liver and the pancreas and heart disease or diabetes are the final outcomes. The problem of obesity is also widely discussed in the world. “Consumption of added sugar in sugar-sweetened beverages has been positively correlated with high calorie intake, and through it, with excess weight and obesity. Added sugar is a common feature of many processed and convenience foods such as breakfast cereals, chocolate, ice cream, biscuits, yoghurts and drinks produced by retailers such as Starbucks.” (Allen, Prentice 2012). The top calorie sources in teenagers’ diets in many developed countries, for example America or the United Kingdom, are sugar sweetened drinks. However there is an evident tendency towards decline of soda consumption in most of developed countries, whereas it started to grow in developing economies. Consumers from India or Vietnam started to focus more upon them. “Denmark began taxing soft drinks and juices in the 1930s. More recently, Finland reintroduced an earlier soft drink tax in 2011, while Hungary taxes sugary drinks as part of its 2011 public health product tax, which covers all food products with unhealthy levels of sugar. France introduced a targeted sugar tax on soft drinks in 2012.” (ECSIP 2014).

In December 2008 Governor David Paterson of New York came out with a proposal to set an 18% state sales tax on sugared beverages, this tax was also related to the fruit drinks with less than 70% of juice and soda drinks as well. The tax did not include diet drinks. Later this tax received the name of the soda tax or the obesity tax. The major purpose of it was to reduce the negative outcomes of overconsumption of sugar, such as obesity and diabetes. “The tax revenue was intended to be used to fund public health programs, including obesity prevention programs. The governor estimated that this tax would reduce the consumption of these affected beverages by 5%; however, the decrease in consumption was estimated to be as much as 14%.” (Klonoff 2009). This is logical that the beverage industry did not receive such proposal positively and the representatives of it were absolutely against such tax. A real controversy started in spring 2009, when introduction of such taxes was supported by New York City’s health commissioner. Thomas Frieden, M.D., M.P.H. (together with Kelly Brownell of Yale University) wrote his article for the New England Journal of Medicine, stating that there is a strong need for the government to interfere into the problem of increased sugary beverage intake in America. They wrote about several aspects of this problem, providing their argumentation for introduction of soda tax. First of all they underlined the aspect of externality, in other words the fact that all taxpayers are to bear the growing financial costs of obese population of their country. Secondly, they pointed out the problem of information asymmetry, because children, who chose to drink sugary drinks, are not able to distinguish the television advertisements and real life facts about this type of products. Finally, the authors concluded that the costs, generated by sugared beverage tax, could contribute to promotion of healthy choices and behaviors.

The supporters of soda tax use the example of tobacco taxes and their efficiency worldwide. Thus they expect that sugary drink tax would also contribute to reduction of soda consumption. They compare the health risks from tobacco and soda and underline the meaning of such measures for the whole nations.

Talking about the economic side of the sugary drinks tax, it is necessary to mention that imposing of this tax would lead to increase of the price for sugary drinks by “an amount P2 from the original price X, and then take on the rest of the tax themselves (P1) in the form of lower profit per unit sold.” (Tax Incidence 2015). This would mean that consumers would have to pay more for purchase the same amount of sugary drunks. Thus they would most luckily have to either reduce their consumption or refuse from buying them at all. This would also influence the amount of drinks sold. In other words, in case the sugary drinks tax is applied, then the burden of it would be shared between consumers and producers more or less equally. A lot depends certainly upon the price elasticity for this kind of drinks. In case if the price elasticity of demand is higher, then the tax burden would be born by the sellers, if the price elasticity of supply is higher than the price elasticity in demand, then it would be born by the consumers.

Experts also find the reasons for implementing a sugar tax in microeconomic sphere. “The reasons for a sugar tax are the negative externalities of consuming sugar. As the consumption of sugar causes health problems (external costs) such as obesity, type 2 diabetes and other diseases, the third party impacted by this is the ‘public health system’ that will need to deal with those issues. More demand for health services leads to higher costs for health care and hence this increased stress on the public health system is a negative consumption externality of sugar consumption.” (Briggs 2016).  The marginal social benefit of sugar consumption is less in comparison to the marginal private benefit. The marginal social benefit would be equal to marginal private benefit and marginal external cost would be received. This happens like this because consumers are more focused upon their benefits of sugar consumption, ignoring the negative outcomes of other third parties or marginal external cost. They would strive towards consuming at the unregulated markets with the aim to make their utility higher. The outcomes would be overconsumption of sugar and loss of welfare. The sugary drink tax could become a good option for correcting of the negative externality and managing of the overconsumption of sugary drinks. The opponents of the tax state that it would force the consumers to pay more, but in reality they would have to pay more for their health care, which would be the result of their extra consumption of sugar. Here might be the situation, when those consumers, who consumer these drinks moderately, would also have to pay more for the sugary drinks and at the same time will not have the increased health care costs. Some researchers consider this fact to be unfair towards these consumers and their need to pay for the negative externality. “Hence a sugary drinks tax may be a more appropriate solution as tax revenue that is collected from the sugar tax can be used to create childhood nutrition programs or obesity-prevention programs.” (Brownell 2009).

A lot is said about the connection between intake of sugar sweetened beverages and obesity. This is a strong argument and thus it should be considered in detail, in order to understand whether this connection is strong enough in reality. The reasons of obesity could be related to a number of factors, including sedentary lifestyle, lack of adequate physical exercise, increase calorie intake, lack of the needed education in the sphere and lack of money for healthy foods. “Many of these issues are beyond the capability of an individual to fully solve. One significant factor in the development of obesity is the intake of sugar-containing soda and other sugary beverages. This important component of obesity can be solved by cutting back on the intake of these substances. Americans today derive 10 to 15% of total calories from sugar-sweetened beverages.” (Klonoff 2009). Such beverages do not contain any valuable calories for human organism. High consumption of sweetened beverages leads inevitably to weight gain and risk of diabetes type 2 development. Moreover the research results show that there is a connection between increased sugar-sweetened beverage drinks intake and increased insulin resistance. At the moment there are debates about interpreting of data about caloric intake, received from sugar sweetened beverages, but “the majority of epidemiologic and experimental evidence indicates that a greater intake of sugar-sweetened beverages is associated with weight gain and obesity.” (Klonoff 2009).

Researchers point out their concerns about the issues of equality and implementation, related to sweetened beverages tax, especially the low income households are discussed. On the basis of economic analysis, it is clear that households would spend less on these drinks, as soon as the tax goes into effect. Consumers would have more disposable income left. Along with this health benefits are expected to make the consumers save money, as low income consumers purchase more SSBs in comparison to higher income consumers. Thus reduced consumption of these drinks, following the implementation of soda tax, should contribute to improving of the situation with obesity. “There is opposition from the beverage industry, which spends over $4 billion/year nationwide on marketing.  Public support for such taxes generally increases with earmarking for prevention activities.” (Cost-Effectiveness of a Sugar-Sweetened and Diet Beverage Excise Tax in Philadelphia 2016). According to the current forecasts, the proposed tax would become not less sustainable, than the previous tobacco taxes. The SSB tax has the real potential for preventing thousands of cases of obesity and diabetes among adult people and children. This would contribute to saving sufficient costs for healthcare in the future, even if to consider the costs, needed for its implementation at the moment. There is an option of using the revenue from the tax for educational and promotion purposes. Official introduction of this tax would attract more public attention to the issue.

However, it is not correct to state that SSBs taxes are absolutely free from problems. Generally they are subject to local and state sales taxes. In many states, a reduced sale tax rate is applied, which is actual for food and food ingredients, but the exemption normally does not include soft drinks. According to the Streamlined Sales & Use Tax Agreement soft drink could be defined as follows “non-alcoholic beverages that contain natural or artificial sweeteners,” excluding “beverages that contain milk or milk products, soy, rice or similar milk substitutes, or greater than fifty percent of vegetable or fruit juice by volume.” (Feldman,  Raykin 2017).This means that there are already states, where SSBs are subject to higher tax rates in comparison to other beverages. In addition there are excise taxes of soft drink wholesalers or distributors. SSBs taxes do not fall under the administration of the state, like it is usually the situation with other sales taxes. In Illinois localities have broad home rule abilities and they could pass taxes and administer them. There are two possible forms of SSB taxes. The first one is the exercise tax remitted by manufacturers or sales tax remitted by retailers. In order to make the consumers change their choices and behaviors, as this is actually the final aim of this tax, it is logical to think that consumers would be expected to bear the economic influence of this tax. Still it is necessary to consider that localities have their limits for the types of taxes, which they could impose, or if they intend to increase their local sales tax rates. Thus for the SSB taxes to reach the set goal of impacting consumers’ behavior, the excise tax should be either passed directly to the consumer or there is another alternative “to require that the tax be passed through to consumers while prohibiting the retailer’s “absorption” of the tax in the same way that sales tax does, without actually making it a sales tax.” (Feldman,  Raykin 2017).

Administrating is secured by local authorities, which generally have not so many resources in comparison to state level taxes, which would allow them audit or provide guidance for taxpayers. The more taxpayers there are, the more difficult is to manage and administrate them. On the surface an excise tax seems to be the best one, but most localities would not be able to impose such a tax to the producers, as they do not have direct control over them. It is possible to collect a tax from retailers, and it would definitely have impact upon consumers, but there is a problem of numerous retailers, each of them is situated at his level. Thus there is a problem of limited resources and lack of the adequate guidance how to adjust to the new law. So, it is difficult to deny that SSBs tax could be implemented without any problems and does not need any additional consideration.

Overall, most of the local governments go on looking for new sources of revenue, different forms of sugar-sweetened beverage taxes are becoming more and more discussed at the national level. The supporters of this tax rely upon the public health care studies regarding the obesity epidemic and other health risks, caused by sugar-sweetened drinks. At the same time they state that such tax is a great possibility to gain extra money for health promotion and propaganda. The last argument is shaky, as at the moment there is no chance to prove that these financial resources would in fact contribute to support the indicated public health care goals. There are lot of controversial issues, related the potentially new SSB tax, for example moral justification, strain and meaning for local economies, inherent regression, possible impact upon health behaviors and so on. In addition there is no clear view about the ways of administrating of this tax. Any tax could not exist separately from economy and social sphere of the country. In other words any tax should be carefully guided and managed, should be integrated into administrative infrastructure and create no additional problems, when it is implemented.

Works cited:

Allen, Lindsay H; Prentice, Andrew. Encyclopedia of Human Nutrition 3E. Academic Press, 2012

Briggs, Adam. “Sugar Tax Could Sweeten A Market Failure”. Nature 531.7596 (2016): 551-551.

Brownell, Kelly D. et al. “The Public Health And Economic Benefits Of Taxing Sugar-Sweetened Beverages”. New England Journal of Medicine 361.16 (2009): 1599-1605

Cost-Effectiveness of a Sugar-Sweetened and Diet Beverage Excise Tax in Philadelphia, PA, Philadelphia City, 2016

ECSIP. Food taxes and their impact on competitiveness in the agri-food sector (Report). European Commission, 2014

Feldman, Jonathan,  Raykin, Alla. Sugar-Sweetened Beverage Taxes Burden Taxpayers, Daily Tax Report, 2017

Klonoff, David. J Diabetes Sci Technol. Published online , 2009

Tax Incidence: How the Tax Burden is Shared between Buyers and Sellers. Economics, 2015

The terms offer and acceptance. (2016, May 17). Retrieved from

[Accessed: March 28, 2024]

"The terms offer and acceptance." freeessays.club, 17 May 2016.

[Accessed: March 28, 2024]

freeessays.club (2016) The terms offer and acceptance [Online].
Available at:

[Accessed: March 28, 2024]

"The terms offer and acceptance." freeessays.club, 17 May 2016

[Accessed: March 28, 2024]

"The terms offer and acceptance." freeessays.club, 17 May 2016

[Accessed: March 28, 2024]

"The terms offer and acceptance." freeessays.club, 17 May 2016

[Accessed: March 28, 2024]

"The terms offer and acceptance." freeessays.club, 17 May 2016

[Accessed: March 28, 2024]
close
Haven't found the right essay?
Get an expert to write you the one you need!
print

Professional writers and researchers

quotes

Sources and citation are provided

clock

3 hour delivery

person