Sugar Tax Economic Consequences And Effectiveness

Question: Discuss about the Sugar Tax Economic Consequences and Effectiveness. Answer: Introduction Sugar drinks consumption has adverse effects on the consumers, and it has posed a challenge for the government to intervene. According to Pettinger (2015), interesting economic arguments are raised on the debate on whether or not to impose a tax on drinks that are sugary. Firstly, optimal allocation of resources is what economics tries to achieve, but this is not always achieved in the free market. The governments role is to reduce the effects caused by externalities (negative externalities). Consumers are made to pay the full social cost by the government intervention in raising taxes. The impact of a higher tax on sugar is that it will raise the cost of producing sugary foods and drinks (Cornelsen et al., 2014). The demand for the sugary foods and drinks will fall since the producers will be forced to charge higher prices for these products. The increment in tax will result in the government raising huge sums of revenues since Australias consumption of soft drink is high (O'Neill, 2016). Consumption will be at the socially efficient level. In the real sense, major health issues will be reduced as a result of the sugar tax imposition. These health issues include; diabetes, tooth decay, and obesity (Brownell et al., 2009 and Branca, Nikogosian and Lobstein, 2007)). The government should use the revenues raised after the sugar tax imposition to deal with diabetes and disease. Sugar Tax Arguments External costs High external costs are imposed on the society from the overconsumption of sugary foods and drinks (O'Neill, 2016). This major problems are caused by the sugar overconsumption and they include; type II diabetes, obesity, and illnesses related to obesity (O'Connor, Imamura and Forouhi, 2014 and Reuters, 2015)) e.g. heart disease, back pains, etc., and tooth decay which mostly affects the younger people. The national health services are offered at very high costs which reflects the external costs. There are adverse effects of work and productivity as a result of poor health. Therefore, the consumption of sugar has a higher social cost than the private sugar cost (Cornelsen et al., 2014). Fig: The Effects of Imposing a Tax on Sugar The diagram above shows how the equilibrium quantity consumed, and the equilibrium prices change as a result of sugar tax imposition. Initially, the equilibrium quantity and prices were at Q1 and P1 respectively. At this point, the Private Marginal Benefits (PMB) and the Private Marginal Costs (PMC) are equal. The tax imposition causes the price of the products to rise from P1 to price P2. At price P2, consumers are not willing to purchase quantity Q1, possibly due to budget constraints (Snowdon, 2015). They are therefore forced to lower their consumption from Q1 to quantity Q2. This results in a new equilibrium at the new point where the Social Marginal Benefit (SMB) and the Social Marginal Cost (SMC) are equal. Q2 is the socially efficient level. The major goal of this research is to discourage sugar consumption by raising the price level. Sugar as a Demerit Good Sugary drinks can be classified as demerit goods in addition to the external costs (Pettinger, 2015). The personal costs associated with the consumption of sugar could be unknown to the users (Griffith et al., 2016). Alternatively, the consumers may be aware of the negative effects of sugar consumption but struggle to stop or lower its consumption since it is addictive. Furthermore, mood swings can be caused by a sugar hit. Energy and endurance rise after the consumption of sugar but falls after it wears out of the body. The insulin produced by the body to sugar surge is only boosted through the intake of more sugar. There is information failure that blinds people on the level of sugar consumption (Reuters, 2015). On average the consumers take many teaspoons of sugar, in addition, they take soft drinks without the awareness of the sugar present in such drinks (Brownell et al., 2009). The option of making informed decisions is in that case disregarded. Some don't know the harmful effe cts of sugar overconsumption. A huge amount of revenue could be raised if there was an increase in sugar tax (Trujillo, Jez and Lascher, n.d.). The additional revenue could be used in the reduction of other taxes, or it can be used in solving the alarming problems associated with sugar overconsumption. The earmarking on spending the funds raise on solving the resulting problems would not create significant issues on the side of the consumers as they will view this to be a fair practice. They will have the perception that the tax raised is used for the right purpose. Shifting Supply and Consumption If suppliers are more responsible and considerate, they can be used in controlling the overconsumption. This is following the fact that supply is said to create its demand. In many fast food restaurants, they have excessively promoted sugary drinks. If there were an incentive to promote healthy drinks that have low sugar levels, the customers would still purchase these products. For instance, if you are given soda, you take soda, but you were given water and not the soda, you would still take water. Suppliers always wish to supply at higher prices. Since the imposition of tax raises the price of soft drinks, suppliers will wish to supply more. But since the consumers have other drinks they can use as substitutes for sugar, their price elasticity of demand is high. If the consumers demand less of the products, supply will be low, and the consumers will carry the whole tax burden (Griffith et al., 2016). To avoid this, the suppliers may introduce some products that are healthier (Marron, Gearing and Iselin, 2015), or rather low-quality drinks at lower prices which may have negative health impacts on the consumers. Sugar Tax and the Low Income Earners For the low-income earners, sugar tax is unfair and cannot be effective. This is because it is regressive; low-income earners lose a high proportion of their income to the increased tax (Marron, Gearing and Iselin, 2015). These people can avoid the tax only if they are price sensitive since they can switch to non-sugary drinks (Snowdon, 2015). If these people are addicted to sugar, there will be a loss in the social welfare since more of their income which could be used in purchasing other products is not used in buying sugar. A sugar tax will greatly hurt the sugar producing companies. This argument is based on the fact that, there are so many alternatives that can be used for sugary products. Thus, the companys sales will fall as a result of the increased prices. The company may not, therefore, be able to pass some proportion of the tax to the consumers. This means that it will carry the increased tax burden alone. Government Influence on the Peoples Habits of Drinking and Eating. Some people argue that it is not just for the government to make decisions that influence consumer patterns consequently changing their lifestyle. They, therefore, argue against a sugar tax. The low-income earner may consider a sugar tax to be an unfair practice since the price charged on the sale of sugar will be equal to everyone irrespective of their earnings. The primary role of government in achieving an income distribution would not be achieved in this case. The sugar consumption associated diseases are commonly extreme among the rich consumers. There are other methods other than the tax that the government can use in lowering sugar consumption. For instance, it can ban advertising of sugary products as it influences the consumption by young people (Brownell et al., 2009). The tax on sugar cannot be compared to tax on products such as alcohol, cigarettes, carbon tax, pollution, and petrol. This is because sugar somehow tends to be a basic need. Tax on a basic need may raise more revenue since the products have to be purchased, but it may have some economic and social consequences. The low income-earners can do away with alcohol and cigarettes; they pose less pollution to the environment, so a tax on such products will transfer wealth from the rich to the poor who may not be affected. The only low-income earners that can be affected by alcohol and cigarettes tax are on those with addictions. Conclusion A sugar tax will be detrimental to the economic status of the low-income households. Considering the fact that diseases associated with overconsumption of sugar are mostly affecting the rich people, much of the benefits from the imposed tax will flow to the rich. Therefore, it can be concluded that the sugar tax is not a fair practice even if the government promises to use the additional tax to curb health issues that results. A sugar tax is therefore not consistent with the governments goal of the income distribution. It is therefore not ethical for the government to impose taxes that influence the human behavior to its advantage of raising more revenue to cater for its health obligations. Even if it doesnt impose a tax on sugar, it is its role to ensure that other means are used in raising capital for the same. Recommendations The sugar tax would only be successful in some classes in the economy. Though some may feel that it is helpful to the economy, for others it poses some form of financial constraints. Sugar has addictive qualities, and some people cannot take drinks that are non-sugary with the presence of a sugary one. This will have negative impacts on the producing company. The government should consider such impacts before making any decision to impose a tax on such a product. Sugar tax has to be imposed together with other policies to be effective. References Branca, F., Nikogosian, H. and Lobstein, T. (2007). The challenge of obesity in the WHO European Region and the strategies for response. Copenhagen, Denmark: WHO Regional Office for Europe. Brownell, K., Farley, T., Willett, W., Popkin, B., Chaloupka, F., Thompson, J. and Ludwig, D. (2009). The Public Health and Economic Benefits of Taxing Sugar-Sweetened Beverages NEJM. [Online] New England Journal of Medicine. Available at: https://www.nejm.org/doi/full/10.1056/NEJMhpr0905723#t=article [Accessed 7 Sep. 2016]. Cornelsen, L., Green, R., Dangour, A. and Smith, R. (2014). Why fat taxes won't make us thin. Journal of Public Health, [online] p.fdu032. Available at: https://jpubhealth.oxfordjournals.org/content/early/2014/05/21/pubmed.fdu032.full [Accessed 8 Sep. 2016]. Griffith, R., Lhrmann, M., OConnell, M. and Smith, K. (2016). Using taxation to reduce sugar consumption. [Online] ifs.org.uk. Available at: https://www.ifs.org.uk/uploads/publications/bns/BN180.pdf [Accessed 7 Sep. 2016]. Marron, D., Gearing, M. and Iselin, J. (2015). Should We Tax Unhealthy Foods And Drinks? [Online] taxpolicycenter.org. Available at: https://www.taxpolicycenter.org/sites/default/files/alfresco/publication-pdfs/2000553-Should-We-Tax-Unhealthy-Foods-and-Drinks.pdf [Accessed 7 Sep. 2016]. O'Connor, L., Imamura, F. and Forouhi, N. (2014). Sugar-sweetened beverages and Type 2 diabetes: will a reduction in consumption reduce the risk of developing diabetes? Diabetes Management, 4(4), pp.311-314. O'Neill, L. (2016). Could a sugary drinks tax improve Australian diets? [Online] The University of Sydney. 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