Extending “sin taxes’” to certain foods and soft drinks is increasingly seen as a practical response to obesity and obesity-related diseases. Several countries and most U.S. states have some form of tax on soda, candy, and/or fatty foods, but they have so far had little or no effect on population health. For a tax to be justified, it should be efficient, fair and effective, and that taxes on food and drink meet none of these criteria.
On the question of whether obesity taxes are effective, it is generally accepted that higher prices lead to lower levels of consumption. If consumption of a given product directly leads to obesity, then it is reasonable to expect that higher prices could lead to lower rates of obesity. The obvious comparison, which is often made by those who campaign for food/drink taxes, is between cigarette taxes and lung cancer, but the comparison does not hold. Cigarette smoking is the main cause of lung cancer, and most cases of lung cancer are caused by cigarette smoking. By contrast, obesity is the result of consuming more calories than an individual burns off. Drinking soda is neither a sufficient nor a necessary cause of obesity, and consumers can easily switch to other high-calorie products if the price of one product rises. A cigarette smoker faced with unaffordable prices might switch to alternative nicotine products, such as e-cigarettes, smokeless tobacco, or patches - any of which would improve his health - but a Pepsi drinker can switch to beer, milkshakes, or fruit juice without reducing his calorie intake or lowering his weight.
Evidence of the efficacy of food and drink taxes is sharply divided between theoretical models (which tend to show a modest but significant effect on body weight), and studies of taxes which have actually been implemented (which don’t). The economics literature suggests that soft drinks have a price elasticity of 0.79, albeit with a very broad confidence interval, meaning that a price rise of 10 per cent should reduce consumption by 7.9 per cent. A conventional economic model can therefore estimate the drop in consumption that would result from a price rise, and a more speculative public health model can estimate the impact on body weight and health outcomes. But even the more optimistic models, based on relatively high price hikes, claim quite modest changes in overall calorie consumption. One study found that a penny-per-ounce soda tax would reduce average energy consumption by just nine calories a day, for example. Another model predicted that a ten per cent tax on milk and fizzy drinks would have even less effect.
Advocates of such taxes argue that small changes in calorie consumption can have a meaningful effect on health over time. Real world evidence has found only a modest effect on consumption and little or no effect on health. This is likely due to substitution effects; people simply consume calories from other sources. A 2010 study found that “soft drink taxes do not appear to have countered the rise in obesity prevalence because any reduction in soft drink consumption has been offset by the consumption of other calories.”
Advocates claim that soda taxes have so far been ineffective because they are set too low. The authors of a 2013 study noted that “Current soda tax rates range from two percent to 7.25 percent and it’s possible these may not be high enough to affect BMI [Body Mass Index].” However, a study published last year focused only on places which have the highest soda taxes and still failed to find an effect on body weight. Its authors concluded that “our results cast serious doubt on the assumptions that proponents of large soda taxes make on its likely impacts on population weight. Together with evidence of important substitution patterns in response to soda taxes that offset any caloric reductions in soda consumption, our results suggest that fundamental changes to policy proposals relying on large soda taxes to be a key component in reducing population weight are required.”
It is of course possible that no state, town, or country has ever implemented a soda tax that is large enough to produce a measurable effect, but that there is some threshold at which taxation would become a meaningful weapon against obesity. Some models have suggested that soda taxes at rates of 20 per cent or more would result in some reduction in average body weight. Evidence from Mexico, which has a high soda tax relative to national income, and Berkeley, which will shortly implement a one cent per ounce soda tax, may provide illumination on this point. To date, however, taxes on soda and candy have been set low enough to be effective as stealth taxes but ineffective as health measures. Indeed, the evidence for using any economic instrument to control obesity is underwhelming., It is certainly possible that food and soft drink taxes could be raised to the point at which they actually ‘work’ (in the public health sense), but this would place a heavy economic burden on consumers and intensify the negative and politically unpopular consequences to which we now turn.
Like all policies, taxing food and soft drink has cost and benefits. Whilst the benefit remains forever on the horizon, the cost can be easily calculated; it is simply the amount of money squeezed from consumers by the tax. In New Zealand, for example, advocates claim that a 20 per cent tax on soda would save 67 lives per year and raise $40 million (NZ). Leaving aside the reliability of the New Zealand forecast, this works out as a cost of $600,000 (NZ) for every life that is extended and does not represent good value for money.
Political action on public health grounds is often justified by the costs of unhealthy lifestyles to the healthcare system, and therefore to the taxpayer. The economic costs of obesity are often misrepresented and fail to account for savings to taxpayers, but even if they were more reliable it is far from obvious that additional taxes would relieve the economic burden. For example, the UK’s Children’s Food Campaign recently claimed that a 20 per cent tax on sugary drinks would reduce healthcare costs in London by £39 million over twenty years, but their own figures suggest that the tax itself will relieve Londoners of £2.6 billion over the same period. The cost of the tax will therefore exceed the savings by several orders of magnitude.
Advocates prefer to talk about soda taxes “raising” money rather than “taking” money. From their perspective, the money raised is simply another benefit of the policy. In fact it is a cost of the policy, and the tax is itself a negative externality. As Jayson Lusk noted in a recent blog post, soda tax campaigners can often expect to benefit financially from the money that is “raised.” Voters are more sympathetic to sin taxes if they are told that the revenue will go towards tackling sin, and advocates are keen for the money to go towards “prevention” and “education.” It is a happy coincidence that many of these advocates work in taxpayer-funded organizations which work on precisely these issues. The Children’s Food Campaign, for example, wants the proceeds of its soda tax (some £1 billion a year) to go towards a “Children’s Future Fund.” Such a fund would create new opportunities for bureaucratic expansion, employment, and mission creep.
There is some evidence to suggest that the public is waking up to the fact that taxes are rarely devoted to any specific purpose in practice and that on the occasions when sin tax revenue is genuinely earmarked, it transfers wealth from middle- and low-income consumers to bureaucrats and pressure groups. In 2012, Californian voters narrowly rejected a new tobacco tax, the proceeds of which were earmarked for “tobacco control research.” The pro-tax campaign, led by Stanton Glantz of UCSF’s Center for Tobacco Control Research and Education, was defeated by voters who disapproved of walling off money to politically unaccountable special interest groups at a time when the state was in dire economic straits.
It is well established that indirect taxes on essentials such as food and drink take a larger share of income from the poor than from the rich. One academic study from 2007 concluded that “fat taxes are unattractive because they are extremely regressive, and the elderly and poor suffer much greater welfare losses from the taxes than do younger and richer consumers.” A further study from 2010 found that taxing food “generates substantial tax revenue, but is highly regressive.”
Since it is difficult for advocates to claim that the poor do not take the hardest economic blow from sin taxes, they tend to make the dubious argument that the poor will enjoy the largest health benefits, or simply assert that sin taxes might not be fair but are justifiable on other grounds. Writing about tobacco taxes in 2002, McLachlan argued: “It is, in my view, not a fair tax but it is a good one… Taxes need not be fair in order to be justifiable… although it is unfair (or, at least, not fair) heavy taxation on tobacco is thought to be fair: it can be raised without a public outcry. Furthermore, the tax is easy and cheap to collect. The whole point of taxation is to raise money: taxation does this bounteously.” It is true that sin taxes are easy to collect, difficult to avoid, and are a lucrative source of income, particularly when demand is inelastic. In the case of tobacco, they can also be popular, since most voters do not smoke. But when it comes to food and drink products that are purchased by the majority, it is a tougher political sell.
The regressive effects of Denmark’s short-lived tax on saturated fat sowed the seeds of its demise. The “fat tax” illustrated many of the problems already discussed. It had a trivial effect on the consumption of the target ingredient, it led to a range of substitution effects, it hurt the poor, and it cost jobs. A few months before its abolition, an opinion poll found that 70 per cent of Danes considered the tax to be “bad” or “very bad.” Although initially supported by nearly all Danish political parties, Denmark’s politicians and opinion-formers turned against it when they saw that it was unnecessarily raising the cost of living, particularly for the poor.
Although the clamor for food and soft drink taxes gets louder every year, such policies have been rejected or repealed far more times than they have been adopted. Berkeley’s new one-cent per ounce soda tax will be the largest of its kind yet tried in the United States, but few see Berkeley as a typical American town, and even San Francisco rejected a similar policy. Compelling evidence from around the world shows that soda and fat taxes have delivered very little in terms of health but have created much in the way of unfortunate and unintended consequences. It is not necessary here to make the argument against such taxes on philosophical grounds. They fail even on their own terms.
Public health campaigners have only a few policies in their armory, and obesity activists rely on three economic levers to modify behavior, namely restricting advertising, reducing availability, and increasing prices through taxes. These policies have been borrowed from anti-smoking activists who, in turn, borrowed them from temperance crusaders. Many obesity activists openly emulate the tobacco control lobby, even going so far as to claim that “sugar is the new tobacco.” But the comparison does not hold. The simple truth is that obesity is, has been, and always will be caused by an excess of calories from any source - frequently also to physical inactivity and various shades of gluttony. Vilifying a single ingredient has no scientific validity, and applying the anti-tobacco blueprint to sugar, soda, burgers or saturated fat is neither rational nor effective. It would be more logical to tax calories in general or to tax people directly according to their body mass index. Both policies would be politically unpopular and morally questionable, but so too would food and drink taxes if they were set at a level at which they could have a measurable impact on obesity.
Herein lies the problem with obesity-related taxes. If they are set low enough to be politically acceptable, they are merely stealth taxes which make no difference to health, but if they are set any higher, they become politically toxic. To date, no country has seen non-trivial health benefits from taxing food or soft drinks at any level. The results are uniformly negative. Theoretically, very high taxes could have some effect, but this is unknown and the unintended consequences of very high tax rates would be severe in terms of making the poor poorer, fuelling the black market, driving inflation, and creating discontent amongst voters.
 See my Adam Smith Institute report “The Wages of Sin Taxes” (2012) to see how these “costs” are exaggerated.
 See my Institute of Economic Affairs’ report ‘The Proof of the Pudding: Denmark’s Fat Tax Fiasco’ (2013) for more details.