Sugar tax

By Eric Crampton 13/10/2014 5

I was on the CBC’s The 180 on Sunday, discussing sugar taxes, fat taxes and paternalism. The audio’s at the CBC site.

While lots of people can point to expanding waistlines as something they find undesirable, just not liking how other people look isn’t a sound basis for public policy.

To the extent that costs are borne by the public health system, it’s not even obvious whether sugar-linked obesity increases or decreases overall health care costs: there’s higher cost at every age, but earlier death. Which effect dominates really isn’t clear.

Further, much of the effect is what economists call a transfer. Sure, there will be some effect on total consumption when the cost of the medical bill is externalised, but that’s different from the costs of being unhealthy. Most of the costs of being unhealthy are borne by the person who’s sick. Maybe you’ll consume a bit less exercise and a bit more unhealthy stuff, at the margin, when your health insurance bill doesn’t vary with your decisions, but you still have to live with the consequences. People would take less care when driving if their insurance premiums weren’t affected by the number of speeding tickets they get, but they’d hardly start rolling their cars on purpose.

For the part of the effect that is due to changes in behaviour under a public health system, implementing a full tax-and-subsidy mechanism to make people behave as they would if they were under an insurance system winds up undoing much of the benefit of a public health system: it replicates insurance premiums, but at a higher administrative cost.

Finally, there’s just something wrong with telling people not only that they have to be signed up for a compulsory insurance system that they might not want, but also that because they’re signed up for it, they’re going to be subject to a pile of taxes and subsidies and regulations to make sure that the overall system isn’t too expensive.

And even if all of that could be swept aside, there isn’t particularly good evidence that soda taxes even work. Instead, there’s just substitution over to calories from non-soda drinks. A comprehensive, and very high, sugar tax would change behaviour. Tobacco taxes have reduced smoking considerably. But recall that, at least in New Zealand, you’re paying $0.55 in tax per cigarette. If the average price of a pack of 20 cigarettes is about $17.20, then tax is 63% of the cost of a pack. A comprehensive tax on all sugars that resulted in a $0.50 increase in the cost of a can of Coke might also reduce sugar consumption. There’s no particularly good reason for doing such a thing, or at least not one motivated in things other than your aesthetic preferences over how other people should behave, but that high a tax could have effects.

Paternalistic regulations on consumption are insulting. They’re classist in application. When they’re based on “costs through the public health system”, they are unlimited in potential range. And when they’re packaged up as “let’s tax soda and subsidise healthy foods”, you empower an army of rent-seekers to argue over the edge cases.

5 Responses to “Sugar tax”

  • I’m unclear what boundaries you put on the externalities in this case Eric. For instance, obesity (which admittedly is multi-factorial) would likely reduce employee productivity. So would tooth decay with is in part causally related to sugar intake.

    There is then a national good to maintaining a healthy workforce – it would support the goal of higher per employee productivity.

    I suspect there is a time sensitivity issue here too akin to that with tobacco, alcohol and all the other yummy stuff that we enjoy – in moderation of course.

    The rolling the car analogy is a little forced imo – again, the timing thing is the imperative here – one more moro bar isn’t going to hurt me right now is it? But deciding to suddenly swerve at speed just because I can – that has clear immediate consequence.

    • Agree that a less healthy employee will be less productive; that employee will also be paid less. Where more productive employees are paid more and are more likely to be promoted, and where people generally understand that it’s harder to do that if you’re horribly out of shape, then people have incentive to consider the effects of their health on their earnings potential. There really then isn’t an externality there. Same as if I decided to take an extra couple weeks’ unpaid leave every year. Similarly, while too much sugar combined with poor oral hygiene rots out teeth, the costs there are borne by the person suffering the resulting toothaches.

  • …and you have a charming but misplaced faith in the accurate targeting of pay for performance!

    • It doesn’t need to be perfect.

      If consumers prefer better goods to worse ones, and lower prices for any given quality of good, then competition pushes companies towards efficiency.
      If companies that are more productive fare better in that competition are less likely to fail, then companies have incentive to get the internal structures right.
      If promoting more productive employees and paying them more makes them more likely to stay rather than jump ship, and if having more productive employees makes the firm more productive, then firms have incentive to pay some attention to individual worker performance.
      And if workers generally expect and see that more productive employees fare better, then they have incentive to account for the effects of stuff on their productivity, from hangover sickies to poor health.

      None of it has to be perfect; nothing can be.