SIN TAXES

Taxes and other policies to reduce consumption of alcohol and sugar

Corrective taxes have long been used to improve social welfare when consumption imposes costs on others; alcohol, fuel and tobacco consumption are leading examples. The welfare improving properties of these taxes is due to their ability to correct behaviour that generates costs that the individual does not fully take into account when making consumption decisions. The traditional focus has been to reduce the costs that are borne by others ("externalities"), but much of the same logic can be applied to costs that are borne by the individual in the future that the individual does not consider at the time of consumption ("internalities"). 

Taxes on `bad' nutrients and on foods that lack nutrients are a prominent example of a policy motivated by a desire to reduce the costs that individuals impose on their future selves. For example, there is concern that excess sugar consumption is contributing not only to growing rates of obesity, but also to other diet related diseases, including diabetes, cancers and heart disease, and that excess consumption is particularly detrimental for children. There is also evidence that poor nutrition, particularly early in life, leads to poor later life outcomes. The costs generated by poor nutrition therefore comprise both an external and an internal component: costs to the public healthcare system are borne by society, but the effect on social and economic outcomes are mainly borne by the individual themselves in the future. Both the externalities and internalities of poor nutrition mean that it is seen as a major public health problem that requires government intervention. Most of the public health literature has focuses on how policy should be used to reduce various health or nutrition outcomes (for example, reducing the amount of sugar people eat), without making explicit the nature of the market failure that policy is aiming to correct, and without considering the potential costs that such policies might impose and some individuals (for example those whose consumption does not generate externalities or internalities).
In this work we aim to bring together insights from the optimal tax literature and the public health literature to consider the designed of sin taxes. Optimal tax design involves trading off the welfare gains of reducing externalities or internalities, with the welfare losses due to the reduction in consumer surplus due to the tax. We also use this set-up to make clear how efficiency and equity considerations interact in designing corrective taxes.

 

MY WORK IN THIS AREA HAS BEEN WITH SOME EXCELLENT COAUTHORS

PIERRE DUBOIS

(Toulouse and IFS)

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MARTIN O'CONNELL

(Wisconsin-Madison and IFS)

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KATE SMITH

(UCL and IFS)

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SELECTED RESEARCH AND ARTICLES

Image by Alexandra Nosova

DUBOIS, GRIFFITH AND O'CONNELL (2020) "HOW WELL TARGETED ARE SODA TAXES?" AMERICAN ECONOMIC REVIEW, 110(11), NOVEMBER 2020

Soda taxes aim to reduce excessive sugar consumption. We assess who is most impacted by soda taxes. We estimate demand using micro longitudinal data covering on-the-go purchases, and exploit the panel dimension to estimate individual-specific preferences. We relate these preferences and counterfactual predictions to individual characteristics and show that soda taxes are relatively effective at targeting the sugar intake of the young, are less successful at targeting the intake of those with high total dietary sugar, and are unlikely to be strongly regressive especially if consumers benefit from averted internalities.

VoxEU article summarising this work

Cheers

GRIFFITH, O'CONNELL AND SMITH (2019) "TAX DESIGN IN THE ALCOHOL MARKET" JOURNAL OF PUBLIC ECONOMICS, VOL 172, APRIL 2019, 20-35

Alcohol consumption generates negative externalities that are non-linear in the total amount of alcohol consumed. If tastes for products are heterogeneous and correlated with marginal externalities, then varying tax rates on different products can lead to welfare gains. We study this problem in an optimal tax framework and empirically for the UK market. We find that heavy drinkers have systematically different patterns of alcohol demands and welfare gains from optimally varying rates are higher the more concentrated externalities are among heavy drinkers.


VoxEU article summarising this work

Image by thom masat

GRIFFITH, R., M. O'CONNELL AND K. SMITH (2020) "ALCOHOL PRICE FLOORS AND THEIR EFFECT ON HEAVY DRINKING" VOXEU, 11 DECEMBER 2020

Negative externalities from consumption are common, ranging from the social and health costs of drinking, smoking or drug abuse, to the environmental damage caused by fossil fuel use. This column exploits the introduction of a price floor for alcohol in Scotland but not in other parts of the UK to assess the efficacy of a price floor for tackling the externalities associated with alcohol consumption. It shows that, if the external cost of an additional drink is at least moderately higher for heavy compared with lighter drinkers, then a price floor leads to larger welfare gains than a simple Pigouvian-style tax on ethanol. However, a tax system that taxes the ethanol in stronger drinks more heavily can do as well as a price floor at reducing heavy drinking while raising tax revenue.

Image by Kelsey Knight

GRIFFITH, R., M. O'CONNELL, K. SMITH AND R. STROUD (2019) "THE EVIDENCE ON THE EFFECTS OF SOFT DRINK TAXES" IFS BRIEFING NOTE, 24 SEPTEMBER 2019

We review the evidence on the effects of soft drink taxes, with a focus on its relevance to the UK context. As of August 2019, 50 jurisdictions levied taxes on soft drinks, many of which have been implemented in the past couple of years. The majority of taxes on soft drinks apply to drinks containing added sugar. Such taxes aim to reduce sugar consumption by increasing the price of sugary drinks, which is likely to lead to a reduction in purchases and a commensurate reduction in consumption. A tax may also lead to reductions in sugar consumption through other channels; for example, due to product reformulation to lower sugar content, or by conveying information about the health costs of sugar consumption. The strength of these effects depends on how the tax is structured, as well as how people and firms respond to the tax.

Image by Glenn Carstens-Peters

GRIFFITH, O'CONNELL AND SMITH (2018) "CORRECTIVE TAXATION AND INTERNALITIES FROM FOOD CONSUMPTION" CESIFO ECONOMIC STUDIES, IFX018

Corrective taxes have been implemented in a number of countries with the aim of addressing growing concern about the rise in obesity- and diet-related diseases. The rationale is that food consumption imposes costs on the consumer in the future that they do not fully take into account at the point of consumption (‘internalities’). Corrective taxes have the potential to improve welfare by reducing suboptimally high consumption. We review the literature on the size of these internalities and on the optimal corrective tax, which depends on the patterns of internalities, the price responsiveness of consumers, and on redistributive aims.

Image by Mae Mu

GRIFFITH, O'CONNELL AND SMITH (2016) "SWEETENING THE SUGAR TAX?", IFS OBSERVATION, 16 DECEMBER 2016

In Budget 2016 the Chancellor announced a ‘soft drinks industry levy’ that aims to reduce consumption of sugar sweetened soft drinks. The levy is due to take effect from April 2018 with two rates, one applying to mid-sugar drinks (with 5-8 grams of sugar per 100 millilitres) and a higher rate applying to high-sugar drinks (with more than 8 grams of sugar per 100 millilitres). An article in The Lancet: Public Health considers the possible consequences of the levy for a series of health outcomes, such as obesity, type 2 diabetes and dental care. In this Observation we propose a simple change to the soft drinks levy which would increase the likelihood of it having a beneficial effect on these outcomes.

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