With the sugar tax taking effect in Britain on Friday, the Lancet has dedicated a whole issue to the wonders of taxation. It includes an opinion piece about sin taxes by the economist Larry Summers which aims to ‘dispel notions that are outdated, misleading, or simply wrong.’ Summers has recently become the co-chair of Michael Bloomberg’s Task Force on Fiscal Policy for Health. Billionaire Bloomberg is very keen on taxing soft drinks at the moment and has given millions of dollars to groups in the USA, Mexico and elsewhere to lobby for them. Last year, he wasted at least $5 million trying to keep the massively unpopular soda tax in Illinois alive.
A key reason why such taxes are unpopular is that they are regressive. Excise taxes on everyday products almost invariably take a greater share of income from the poor than from the rich. Taxes on tobacco, fast food and soft drinks are doubly regressive because people on below-average incomes tend to consume more of them in the first place.
This is not a notion that is ‘outdated, misleading, or simply wrong’. It is a demonstrable fact. In Britain, the poorest decile spend 34 per cent of their disposable income on indirect taxes, including 2.9 per cent on tobacco duty and 2.0 per cent on alcohol duty. For the richest decile, the equivalent figures are 14 per cent, 0.1 per cent and 0.9 per cent respectively. There is no doubt that the sugar tax will be similarly regressive when it comes into effect on Friday.
If you were employed by one of the world’s richest men to lobby for higher taxes on the poor, you might start to wonder if you were one of the baddies. Summers’ editorial seems designed to help him and his readers sleep easier at night by redefining the meaning of the word ‘regressive’ and engaging in some wishful thinking about the efficacy of such policies.
His central argument is that while the financial impact of sin taxes is regressive, the health impact is progressive. The aim of such taxes is to reduce consumption of potentially unhealthy products, thereby improving health. Since people on low incomes are least able to afford these products, any price rise will disproportionately benefit their health. Sugar tax campaigners are fond of this argument. For example, Simon Capewell of Action on Sugar says: ‘Poorer people would benefit more from a sugary-drinks tax, so it would be progressive in health terms’.
This argument has a certain superficial appeal and yet it is not borne out by the facts. For a start, there is no evidence that taxes on soft drinks have ever improved the health of anybody anywhere. The evidence base cited by sugar tax campaigners, such as it is, is dominated by theoretical models devised by fellow advocates of sugar taxes, but if you look at the places that have actually introduced such taxes, there has not been a decline in the consumption of sugary drinks, let alone in obesity.
The great success stories of the sugar tax movement supposedly took place in Mexico and Berkeley, California, but ‘public health’ campaigners routinely misrepresent what happened in these places. Evidence published by Mexico’s National Institute of Public Health shows that per capita consumption of sugary drinks was slightly higher after the soda tax was introduced than it had been before, and there was no statistically significant change in consumption of soda in Berkeley after its tax was introduced. The only noticeable effect of the Berkeley tax was to push shoppers out of town.
Tobacco taxes have more of an effect, not least because they tend to be much higher, but there is precious little evidence that poor people are more responsive to them (and therefore ‘benefit’ more from them). In the 1950s, smoking rates were much the same across the socio-economic spectrum. If people on low incomes were more responsive to sin taxes, we would expect decades of rising tobacco duty to have made smoking the preserve of the wealthy. The reality could not be more different. People who earn less than £10,000 a year are now twice as likely to smoke as people who earn more than £40,000 a year. Smoking has increasingly become the preserve of the poor.
In the case of alcohol, there is a closer relationship between affordability and consumption in so far as low income groups tend to drink less than high income groups. Alas, this does not translate into better health outcomes. The socio-economic groups that consume the least alcohol suffer the most alcohol-related harm, a phenomenon known as the alcohol harm paradox.
The claim that poor people benefit from paternalistic taxation is therefore highly questionable and the claim that they benefit from them more than rich people is plainly wrong. It is based on the crude assumption that those who can least afford a product will be most likely to abandon it when the price rises. But it will always be cheaper to drink water than wine, to eat boiled vegetables rather than McDonalds and to be a nonsmoker rather than a smoker. If affordability were the decisive factor, the poor would be paragons of health and the rich would be gout-ridden, chain-smoking wrecks.
If you ignore all the reasons why people make certain lifestyle choices, it seems intuitive that people on low incomes will be most responsive to a tax hike, but this is to ignore a great deal. Once the choice has been made, a tax becomes something that you either stump up for or try to swerve by switching to a cheaper brand and dabbling in the shadow economy. That is how most people, rich and poor alike, respond to tax rises.
As a result, the most notable impact of sin taxes is to relieve ordinary consumers of their hard-earned cash. The regressive financial effects are real and well-evidenced whereas the ‘progressive’ health effects only exist in the spreadsheets of ‘public health’ computer models. No amount of sophistry can disguise the fact that sin taxes clobber the poor. To all intents and purposes, they are fines imposed on ordinary people as punishment for engaging in activities that displease super-rich do-gooders such as Michael Bloomberg and Jamie Oliver. If you support them in the full knowledge of this fact, you are probably one of the baddies.