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.