As published in City AM Wednesday 11th April 2018 Written by Paul Ormerod, Cowry's Chief Economist and a visiting professor at University College, London, and author of Positive Linking: How Networks can Revolutionise the World.
One of George Osborne’s last acts as chancellor in 2016 was to announce the so-called sugar tax. This came into force last week, in line with the original timetable.
Drinks manufacturers are taxed according to the volume of sugar-sweetened beverages they produce or import. The tax increases with the sugar content.
The aim is to combat the rise in obesity. The rise has been rapid, and there could be worse to come. The UK tends to lag behind the US, where the spread of obesity has been truly dramatic.
There is no doubt goodwill behind the motives of the sugar tax: a desire to save others from potentially harmful actions. Obesity, for example, shortens lives and is a major cause of diabetes.
But the economic rationale is based on the more austere concept of negative externalities.
Externalities are a key topic in both economy theory and practice. They arise whenever someone’s actions create consequences for others.
An obese person is likely to need expensive healthcare. This generates costs – the “negative” bit – for taxpayers, who are called upon to provide the finance for the public health system to treat the obese (although, of course, the lower life expectancy of the obese may to some extent offset their higher health costs).
It is fashionable in liberal circles to portray the obese as being in some way victims. It is not their fault that they are fat.
In contrast, economics places the responsibility for choices which are made squarely on the inpidual. It is the inpidual who acts with purpose and intent in selecting a particular alternative from the ones which are on offer.
It would be just as plausible in theory to assign the tax directly to the obese. Anyone with a Body Mass Index of, say, more than 40 – which is huge – could have to pay for any health costs which arise. In practice, of course, most of them would be unable to afford it.
So will the sugar tax work?
At one level, the answer is yes. Some manufacturers are already reducing the sugar content of drinks, for example, though this may simply switch consumption to brands which retain high sugar content.
Price increases will deter consumption, of course. But there is a large amount of empirical evidence which shows that the immediate impact of any tax like this tends to fall away over a couple of years. The eventual effect is considerably weaker than in the first few months.
A neat recent study by Pierre Dubois and colleagues at the respected Institute for Fiscal Studies offers an even less upbeat view of the efficacy of the tax.
Consumers with high-sugar diets are less sensitive to price changes than people with lower sugar habits. The tax is likely to reduce sugar consumption in the latter group even further, while having little impact on the ones who really need to.
Osborne does have things to be proud of, such as succeeding in creating the impression in financial markets that the coalition government was fiscally prudent. But the sugar tax is unlikely to be one of his best remembered initiatives.