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Economist Chris Snowdon explains why the sugar tax is a bad idea

Tom Bailey

Tom Bailey
Feb 27, 2017

Later this year, the government is likely to introduce a new tax on sugary drinks, in a bid to reduce obesity.

The government says that it will be good for Brits. Many, however, disagree. The sugar tax, some say, will hurt consumers. 

We got in touch with Christopher Snowdon, an economist from the Institute of Economic Affairs, to find out his view.

Below is our interview with him, where he tells us why he thinks that the sugar tax is bad for consumers, as well the problem with various other consumer taxes.

Our questions are in bold, with Chris's answers beneath. 

 

Q: The sugar tax is set to be introduced this year. Why should consumers care?

A: It’s going to take money out of their pockets! The amounts are not trivial either. 

The tax is going to be 24p per litre so a 1.75 litre bottle of Coke, for example, is going to jump from £1.50 to £1.92.

The sugar levy is predicted to take half a billion pounds from British consumers each year. 

 

The government says it isn’t a tax on consumers. Instead, costs will be absorbed by companies that make sugary drinks – what do you say to that?

George Osborne presented it as a tax on corporations, but that was just spin.

The evidence from other countries shows that companies nearly always pass taxes onto consumers (as economic theory would predict).

Indeed, they tend to pass it onto consumers and then some. So, that bottle of Coke is probably going to be rounded up from £1.92 to £1.99.

Osborne also tried to portray the tax as optional on the basis that the ‘corporations’ wouldn’t have to pay it at all if they take all the sugar out of their drinks.

That is obviously silly. As long as there is demand for sugary drinks, the companies are going to keep producing them. 

 

Are such taxes on consumer goods a new thing? Where does the idea come from?

There’s nothing new about sales taxes. They’re actually a pretty effective way of generating income. Nor is there anything new about taxing sugar, salt, tobacco or alcohol.

There was a time in the nineteenth century when tobacco and alcohol taxes accounted for a third of the British government’s entire revenue.

From the Treasury’s point of view, these are good products to tax because they are demand inelastic, i.e. people still buy them when you raise the price.

They are politically useful because they give the government a chance to tax the unemployed, the old and the poor and still feel virtuous.

Regressive taxes are usually unpopular, but if they’re seen to be for the good of the nation’s health, politicians can get away with them.

 

Do they always hurt consumers? Who do they benefit?

They always hurt consumers financially. The claim is that they benefit people’s health but there is vanishingly little evidence of that when it comes to taxes on soft drinks.

The beneficiaries are the people who don’t buy the product because the tax effectively subsidises them.

In the case of the sugar levy, the beneficiaries will be the people who get new jobs created for them to run the anti-obesity bureaucracies that the government intends to create. 

 

The idea of minimum pricing on alcohol is also regularly discussed – why should consumers care about this?

Again, it will take money out of their pockets, unless they are teetotal or only drink expensive alcohol.

In the case of minimum pricing, there won’t even be any tax revenue to offset the loss to consumers. Minimum pricing just creates a deadweight loss.

The people who would prefer to drink relatively cheap alcohol will be forced to buy more expensive alcohol.

There is also a real danger that the minimum price will go up and up once it is in place.

The people who campaign for minimum pricing are in the modern-day temperance movement and don’t have any objective idea of how much alcohol should cost.

They simply think it should be more expensive. Always.

 

What other taxes are there that hurt consumers?

Tobacco duty is highly regressive and so is alcohol duty to a lesser extent.

Both of these taxes are a lot higher in Britain than in most European countries and they are the main reason we have a black market for tobacco, in particular. 

Fuel duty, which is also very high and damages the economy.

The Brexit vote led to a fall in the pound and, as a result, rising fuel prices. This is recognised as being a problem for economic growth, but it should also be acknowledged that a very large proportion of the price of fuel is tax.

Cutting taxes on petrol and diesel would drive growth and lower the price of goods that are transported by road.

 

If you could repeal one consumption tax, which and why?

Tobacco duty is probably the most damaging tax for people on low incomes, but if I could only repeal one right now it would probably be the sugar levy.

I fear that the sugar levy will open the door to a whole range of taxes on food and soft drinks that will increase the cost of living while transferring wealth from the poor to the rich.

If we can stop the sugar levy, we can prevent that deluge.

For more news and analysis affecting consumers, sign up to our email list above. 

Follow Christopher Snowdon on twitter, @cjsnowdon

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