Sin taxes: the devil is in the detail

Johan Fourie is associate professor in economics at Stellenbosch University.
Johan Fourie is associate professor in economics at Stellenbosch University.

Suggestions that higher sin taxes will create a less sinful society may be well-intentioned, but can easily lead to worse outcomes, not better.

We all consume way too much sugar than is good for us. I’ve tried hard to reduce my own sugar intake over the last two years, and, I thought, quite successfully, until a friend recently pointed out the sugar content  of Mrs Ball’s chutney and All Gold tomato sauce – staples in the Fourie household. He won’t be invited for dinner again. 

But the consequences of our overindulgence is no joke. Excess sugar consumption is linked to a range of diet-related diseases, such as diabetes, cancer and heart disease. In South Africa, these issues are of particular concern. 

The 2016 South African Demographic and Health Survey finds that 68% of women, 31% of men and 13% of children are overweight or obese. The National Income Dynamic Survey exposes the large gender gap for the poor: while only 4% of men in the poorest income quintile is obese, 31% of women in the same quintile are. That is why obesity-related diseases are among the top causes of death in the country; its prevalence only rivalled by HIV/Aids.

Most of these sugars come from what we drink. The World Health Organization recommends that a male adult should consume no more than 12 teaspoons of sugar per day; a 330ml can of Coca-Cola contains eight. Such soft drinks are a particularly large contributor to dietary sugar among the young, the poor, and those with high overall dietary sugar intake.

The obvious question is what to do about it. In 2018, SA chose to tax sugar-sweetened beverages by introducing the Health Promotion Levy. The tax caused an average 11% increase in the price of soft drinks. And it seems to have had an immediate impact:  According to a Fitch Solutions report, sales of carbonated drinks fell 5% in 2018 to R6.8bn, down from R7.2bn. 
But the tax did generate more than R3bn in revenue for National Treasury, suggesting that consumers continued buying soft drinks.
This suggests that they are price inelastic, meaning that even if the price increases, demand for it won’t decline proportionally.

The fact that consumers are unlikely to shift to other products has consequences: A 2017 Econex Consulting (now FTI Consulting) report noted that the poor will be most affected as cheaper soft drinks typically contain more sugar.

Two years after the implementation, the jury is out on whether SA’s Health Promotion Levy has been a success. But a new research paper forthcoming in the American Economic Review may provide clarity on how consumers behave. It uses Britain, which also implemented a sugar tax in 2018, as case study. 

To identify whether a sugar tax was indeed successful at reducing sugar consumption, the authors use a novel survey of more than 8m observations from 5 555 individuals between 2009 and 2014 that recorded all their purchases of snacks and non-alcoholic drinks for consumption outside the home. This allows them to determine precisely how individuals of varying ages and income levels respond to a price increase. 

They then simulate what would happen with the introduction of a tax. Their results show that the sugar tax would have had the intended  consequence: The Soft Drink Industry Levy of 2018 reduced the amount of sugar consumers get from soft drinks by 21%. 

They also find that although consumers switch to alternative sources of sugar – both drinks and snacks – these do not fully substitute the sugar lost from soft drinks. But because they use individual-level data, they can show that this overall effect also masks large variation between different age and income groups. 

They first show that age is correlated to a preference for soft drinks, but that this relationship is U-shaped: “On average those aged 13-21 have stronger preferences than those aged 22-30, who in turn have stronger sugar preferences than older individuals, but among older individuals sugar preferences are increasing in age.”

The impact of the tax is quite different on these two groups. The good news is that kids seem to respond best to the sugar tax; those aged 13-21 reduce their sugar consumption in response to the tax by over 40% more than those above 40. The bad news is that the tax is almost completely ineffective at targeting the on-the-go sugar intake of people with a consistently high level of dietary sugar in their overall diets. 

This is because, the authors suggest, “they tend to have strong preferences for sugar and to be less price responsive”. Introducing sugar taxes benefitted moderate users – who cut down their consumption – but had little effect on those most addicted to it.

These results suggest that an increase in sin taxes should be introduced with caution. Humans do not all behave the same – and is the reason why social science is such a difficult, but also wonderfully interesting area of study. 

Raising sugar taxes may benefit some, but could harm others who, because of strong preferences and addiction, will see more of their budget spent on things that are bad for them.

If this is true of sugar, it is even more so for the two classic sin taxes: cigarettes and alcohol. The ban on the sale of cigarettes during the first three stages of lockdown was intended to reduce consumption. 

Those that one might classify as social smokers might have been able to adjust their behaviour. But for the vast majority, I suspect, things were not that simple.

These consumers were forced to illegally purchase poorer quality smokes at massively inflated prices. To do so, they would have had to cut back on other expenses.Suggestions that higher sin taxes will create a less sinful society may be well-intentioned, but can easily lead to worse outcomes, not better. As so often in economics, the answer is: it depends. 

It depends on the elasticity of demand, which in turn depends on preferences, whether there are good substitutes, and other social and cultural factors that are often ignored. The devil is in the detail.
Read more
This article originally appeared in the 10 September edition of finweek. You can buy and download the magazine here.
finweek, september, finsep

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