Meeting a sweet and sticky end: Obesity and sugar taxes in Australia
In life, three things are certain — death, taxes, and debates about sugar taxes.
The annual should-we-or-shouldn’t-we debate about implementing a tax on food and beverages with a high sugar content was sparked again by a Four Corners investigation into the obesity epidemic in Australia a few months ago.
You may have read some of these scary statistics: 60 per cent of Australians today are overweight or obese, and by 2025, that is expected to rise to 80 per cent. The Grattan Institute estimates that obesity-related problems, such as additional government spending required on health and foregone income tax revenue from unemployed obese individuals, cost the wider community a total of $5.3 billion per year, as illustrated below. In economic terms, these costs are a deadweight loss to society caused by the existence of a negative consumption externality — in other words, my decision to consume excessive amounts of sugar imposes costs on not only myself but also on you, a third party, even though you did not participate in my consumption decision.
The obesity epidemic is undeniably a multi-faceted problem involving complex cultural issues which cannot be solved by any single government policy. However, a range of actors, from the Grattan Institute to the Australian Medical Association and the World Health Organisation, are increasingly calling for the introduction of a tax on non-alcoholic sugary beverages. Sugary drinks are namely high in sugar (a can of Coke having 9 of your recommended daily average of 6 teaspoons of added sugar) but lack any other valuable nutritional value, unlike, for example, hamburgers or chocolate. Based on US evidence, Grattan’s report estimates that 10% of obesity in Australia is linked to the over-consumption of sugary drinks.
So, if the Australian government were to introduce a sugary beverages tax, what would it look like?
There are two types of taxes the government could apply. A specific excise tax is applied to a quantity related to the good, which might be the volume of the drink or the volume of sugar content within it. Comparatively, an ad valorem excise tax is applied to the value of the good, which would be a percentage of a drink’s retail price. While the tax would technically be levied on manufacturers, overseas evidence suggests it would be passed on in full to the consumer.
Given the aim of the tax is to reduce consumption, a specific excise tax on sugar content would be more appropriate than an ad valorem tax on the retail price. This is because taxing the sugar content directly incentivises manufacturers to reduce the sugar in their drinks — in fact, after the imposition of a specific excise tax on sugar content in the UK this year, Fanta cut the sugar in their drinks by a third, and Ribena by a half. In addition, applying an ad valorem tax to goods encourages bulk buying of that good, since the tax is proportionate to retail price. By comparison, under a specific excise tax each gram of sugar is taxed constantly, and incentivises consumers to substitute for drinks with a lower sugar content.
You can probably see that this idea is not exactly novel — the Australian government already imposes excise taxes on alcoholic beverages and tobacco products in order to reduce consumption and the associated deadweight losses to society. Overseas, 28 other countries have now imposed a tax on sugary beverages. If the government were to follow the Grattan Institute’s 2016 recommendation and impose a tax of 40 cents per 100 grams of sugar in sugary drinks (see the diagram below), it would generate an estimated $500 million in annual tax revenue, and reduce aggregate consumption of sugary drinks by an estimated 15%, or an average of 10 litres per person per year. Sounds great, right?
Against a sugar tax
However, actors lobbying against a tax on sugary drinks (think the Australian Beverages Council, Coca-Cola Amatil, sugar cane producers in Queensland, and the Nationals’ MP George Christensen) raise a number of issues with the tax.
Firstly, they argue that a tax on sugar places a disproportionate burden on low-income households. Assuming that all households spend roughly the same amount on food, food expenditure counts for a larger proportion of low-income households’ budgets than high-income households. Therefore, a tax on sugary drinks causes the average price of food to rise for all households, but this price rise is felt relatively more by low-income earners. Additionally, as illustrated in the graph produced by the Grattan Institute below, when ranked by income, the lowest quintile of households typically consume more sugary drinks than the highest quintile of income earners. Low-income households thus end up paying more tax than high-income households. For these reasons, a sugar tax would operate regressively, taxing individuals at a decreasing rate as their income increases.
However, this analysis fails to take into account how small the additional tax burden would be on each individual, given that only one market segment, non-alcoholic sugary drinks, is being taxed. Further, consumers can very easily avoid this small burden by substituting soft drinks for non-sugary drinks — which is, in fact, the very aim of the policy. Therefore while low-income earners will admittedly pay the most tax, they will also benefit the most in terms of seeing the greatest reduction in their consumption of sugary drinks, and therefore the greatest improvements in their health outcomes.
Lobbyists counter this argument by asserting that as sugar is “addictive”, and that as a result consumers’ demand for sugary drinks is inelastic, or unresponsive to changes in price. Therefore, a small change in the price of soft drinks will not change their consumption choices, and only make them poorer. This indeed does highlight the importance of creating cultural change in people’s consumption habits — something a sugar tax alone may not be able to achieve.
More fundamentally, George Christensen emphasises the ideological problems with a sugar tax — namely, that individuals need to take personal responsibility for their own choices, whether that is to smoke cigarettes or consume sugar, and the government has no role in intervening in these decisions. As he explained on Four Corners, “I am a fat bloke, right? … I don’t blame the sugar industry”.
“I blame myself for putting that product down my gob. That’s what caused it — me, myself and I.”
However, George is forgetting about the $5.3 billion of annual external costs which his consumption imposes on the rest of Australia. In this way, a tax on sugary drinks is no more difficult to justify than the taxes we already have on alcohol and cigarettes. If an individual’s consumption choices impose external costs on third parties, then taxing that consumption choice is a way of forcing them to internalise those costs, or forcing them to take responsibility for those external costs. Therefore, a sugary beverage tax would arguably facilitate individuals taking personal responsibility for their consumption decisions, not hinder it.
Further, George is making an implicit assumption of rationality in the sugary drinks market — namely, that consumers are fully informed about the sugar content in their drinks and the consequences of their consumption. This is not exactly a trivial assumption — as the Grattan report highlights, deceptive marketing and consumers’ lack of knowledge about the health risks of their consumption likely amount to a market failure, therefore demanding government intervention.
The campaign to reduce smoking rates in adults in the 1980s employed a wide suite of measures, from marketing and regulation targeting the cultural and behavioural aspects of smoking, to taxation to increase the price of tobacco. This approach powerfully reduced adult smoking rates from 35% in the 1980s to 15% today. Similarly, a tax on sugary drinks is not a “silver bullet”, and would need to be complemented with other measures in order to create real cultural change and not just impose a higher tax burden on low-income earners. One such measure could be a subsidy towards the very high costs of fresh fruit and vegetables, thus helping low income earners to afford healthier options. But given the very dark forecasts for Australia’s waistlines over the next decade, imposing a tax on sugary drinks is an undeniably necessary place to start.