The soda tax as a measure for sustained change in consumption

Matteo Galizzi, George Loewenstein

14 June 2016

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George Osborne has announced the introduction of the first ‘soda tax’ in the UK (Inman 2016). Starting in April 2018, a tax of 24p and 18p will be levied on each litre of high-sugar and low-sugar fizzy drinks, respectively, raising £520 million in the first year alone.

Six years ago, the first Cameron government launched the Behavioural Insights Team. The so-called ‘nudge unit’ has now left the Cabinet Office, but the UK Government still owns a share of it and continues to consult with it. It is tempting, therefore, to see the ‘soda tax’ as the newest type of nudge (Economist 2016), but the soda tax is anything but a nudge. As Thaler and Sunstein (2008) put it, “a nudge is any aspect of the choice architecture that alters people’s behaviour in a predictable way without forbidding any options or significantly changing their economic incentives”. For example, a nudge to soda consumption would be to make non-sugared drinks the default option for meals in fast food restaurants.

Rather than nudges, taxes of the type announced by Osborne are the prototypical policy tool of traditional economics. Like nudges, however, the soda tax does have a behavioural rationale, at least in part.

Economists, even including the most forceful advocates of free markets, do recognise that taxes on products can be appropriate in situations in which there are externalities – costs people impose on others and fail to internalise. Carbon gases are a good example – a carbon tax leads consumers and producers to internalise costs they impose on others that they would otherwise ignore. By the same logic, taxes on sugared drinks can be justified on the basis of externalities that soda drinkers impose on others in the form of healthcare costs – estimated at about £27 billion per year for the NHS. 

The more controversial behavioural rationale for the soda tax is that soda consumption also produces internalities (Herrnstein et al. 1993), costs consumers impose on themselves but don’t internalise, in part because they are short-sighted and the consequences of unhealthy eating are delayed.  Myriad studies have shown that simply informing consumers about the caloric content of food and drink has no impact (Downs et al. 2009), nor have more creative approaches such as telling consumers how many minutes they would have to run on a treadmill to burn off the calories (Jue et al. 2012). If even informed consumers take these costs into account insufficiently, these internalities could be used as an additional rationale for taxing soda. 

Even if one accepts the existence of internalities as a rationale, however, there are countervailing arguments against taxing soda. 

First, the soda tax is regressive, because poor people consume disproportionate amounts of soda (Leicester and Windmeijer 2004). Introducing a soda tax adds one more tax on activities that lower-income people are more likely to engage in, such as alcohol consumption, gambling, and smoking. In an environment in which most of the big tax breaks go to high income individuals (e.g. tax relief on savings) it is difficult to justify adding yet another tax to those who can least afford to pay it. The effects of the tax would be less regressive if the tax has a greater health impact on low income people. But it is unrealistic to envision that the soda tax (Smith 2016) will make much of a dent in the ongoing obesity epidemic in the UK (OECD 2014).

The second argument against the soda tax is that soda prices are just the tip of the iceberg in terms of the mispricing of food. Not only soda, but all forms of ‘junk food’ have become progressively cheaper than healthy food in recent decades (Mazzocchi 2009), which economists have argued is largely responsible for the obesity epidemic (Finkelstein et al. 2005, Sassi 2010). Moreover, increases in the value of people’s time have further enhanced the appeal of pre-prepared and take-away foods, which are now ubiquitously and constantly available (Courtemanche et al. 2015). Since the food and retail industries also actively engage in ‘super-sizing’ practices - including pricing large drinks and highly caloric side orders in ways that make them seem like ‘deals’ (if you ignore the health effects) - junk food represents a hard-to-resist temptation that constantly lures consumers, especially from the most disadvantaged socioeconomic conditions (Dubois 2007) who are likely to face tight family budgets, limited time for preparing fresh food, and who often live in ‘food deserts’.  Why single out soda for a tax, when low soda prices are just one tiny part of unhealthy foods mispricing?

One answer is that the government should start tackling the politically easiest target, and sweetened drinks have no compelling nutritional component. But to have any prospect of significantly reducing calorie intakes, a more comprehensive ‘junk food tax’ would have to be levied on the broadest range of high-fat, sugary, and nutritionally poor foods and drinks (Renton 2016).  If only soda is taxed, there is a significant likelihood that consumers will simply switch to other unhealthy, tax-exempt drinks or foods (Dolan and Galizzi 2015).

To minimise regressive effects, systematically realign prices, and lead to sustained behavioural change, a generalised junk food tax should be accompanied by a comprehensive system of ‘healthy’ subsidies, regulation of ‘super-sizing’ practices, and changes in the ‘choice architecture’ of shops and restaurants. There is a lot of scope for nudges, but traditional economic tools have a place as well, and in fact they can be justified on the same behavioural basis.

References

Courtmanche, C, J Pinkston, C J Ruhm, and G L Wehby (2015), “Changing economic factors and the rise in obesity”, VoxEU.org

Dolan, P, and M M Galizzi (2015), “Like ripples on a pond: Behavioral spillovers and their implications for research and policy”, Journal of Economic Psychology, Vol. 47, 1-16

Downs, J S, G Loewenstein, and J Wisdom (2009), “Eating by the numbers”, New York Times

Dubois, P (2007), “Obesity’s on the rise – let’s have the courage to tax junk food!”, VoxEU.org

The Economist (2016), “A tax on sugar: Pricier pop”, 19 March

Finkelstein, E A, C J Ruhm, and K M Kosa (2005), “Economic causes and consequences of obesity”, Annual Review of Public Health 26: 239-157

Herrnstein, R J, G F Loewentstein, D Prelec, and W Vaughan Jr (1993), “Utility maximzation and melioration: Internalities in individual choice”, Journal of Behavioral Decision Making 6, 149-185

Inman, P (2016), “Will the sugar tax be all fizz or a weighty blow against obesity?”, The Guardian, 19 March

Jue, J J S, M J Press, D McDonald, K G Volpp, D A Asch, N Mitra, A C Stanowski, and G Loewenstein (2012), “The impact of price discounts and calorie messaging on beverage consumption: A multi-site field study”, Preventive Medicine 55(6)

Leicester, A, and F Windmeijer (2004), “The ‘fat tax’: economic incentives to reduce obesity”, The Institute for Fiscal Studies, Briefing Note no. 49

Mazzocchi, M, W B Traill, and J F Shogren, Fat economics: Nutrition, health, and economic policy, Oxford

OECD (2014), “Obesity update”, OECD Directorate for Employment, Labour and Social Affairs

Renton, A (2016), “The sugar tax is a great idea. Why not go after processed foods too?”, The Guardian, 20 March

Sassi, F (2010), Fit not fat, OECD publishing

Smith, K (2016), “The soft drinks levy”, The institute for Fiscal Studies, post-budget presentation

Thaler, R, and C Sunstein (2008), Nudge: Improving Decisions about Health, Wealth, and Happiness, Yale University Press

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Topics:  Health economics Taxation

Tags:  obesity, soda tax, health, Nudge, UK, tax

Assistant Professor of Behavioural Science and ESRC Future Research Leader, LSE

Herbert A. Simon University Professor of Economics and Psychology, Carnegie Mellon University

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