The Sugar Tax
A sugar surcharge is simply sensible
Covid-19 may get all of the attention, but Covid’s lethality was inextricably tied to another epidemic…a chronic illness epidemic of diabetes, obesity, heart disease…etc. A large body of evidence has concluded that the overuse of sweeteners, especially in beverages, is causing immense societal harm and leaving many vulnerable to disease. A small levy could correct these negative effects, improving health, while preserving the freedom of choice.
The abundance of sugar, high fructose corn syrup, and other sweeteners in our food can be detrimental to our health. The mechanisms at play are complex, but at the risk of oversimplification, the process works roughly like this: The body has three primary “fuels,” sugars/carbs, proteins, and fats. Of these three, sugars are the easiest and quickest to consume for energy. Thus, if sugar is available it is processed first.
To absorb the energy in sugar, the pancreas releases a hormone called insulin to allow the sugar to enter our cells. However, when a lot of sugar is released into the bloodstream on a frequent basis, cells’ response to insulin weakens…they become insulin resistant. The pancreas keeps making more insulin to try to make cells respond. Eventually, the pancreas can’t keep up and blood sugar rises, a condition known as Type II Diabetes.
To be clear, it is not merely the amount of sugar consumed that matters, but also how it’s consumed. Some sugary foods trigger a more acute glycemic response than others. This is where sugar-sweetened beverages (SSBs) become salient. Nothing is more potent than SSBs that provide a direct liquid sugar injection into the bloodstream. For this reason, they are considered uniquely problematic and pernicious.
Along the way to diabetes, obesity and other chronic health conditions usually follow. These include just about every major disease in the “developed” world, including heart disease, cancer, obesity, kidney disease, nerve damage, and vision damage, just to name a few.
The costs of diabetes are immense. In the United States, one of every four dollars of healthcare goes to treating people with diabetes, or over $400 billion annually when factoring in direct and indirect costs.
Additionally, older people with diabetes have a higher prevalence and intensity of cognitive impairments, including dementia, vascular dementia, and Alzheimer’s. In a democracy, where we depend on each other to act and vote rationally, the cost of this potential impairment, even if only slight, is extremely troubling.
Of Externalities and Internalities
A “Sugar-Sweetened Beverage” is any beverage sweetened with a caloric sweetener. In America, notably, SSBs consumption tends to be higher in low-income groups. Indeed, people with incomes under $25,000 a year consume about 200 calories of SSBs a day, while those earning $75,000 or more consume under 117.
Some jurisdictions have chosen to tax SSBs out of concern for public health. The logic behind an SSB tax is a classic externality-correcting levy. In economics, negative externalities are simply a cost caused by an actor that is not incurred by the same actor.
In this case, companies profit from SSB sales but do not bear the cost of treating people with Type II diabetes or other ailments that result from those sales. Indeed, it is estimated that 88 percent of the cost of obesity, for example, is borne by third parties.
Since the consumption of SSBs is proven to cause disproportionate harm, a levy can reduce that harm by discouraging SSB consumption and “internalizing” the costs on the producers and sellers of those products. This is an economically efficient means of improving social market outcomes.
In addition to externalities, where third parties incur the cost of decisions, there is a body of evidence that suggests people often understate or do not understand how certain behaviors affect themselves. In this case, how SSB consumption impacts their physical and cognitive health. These are negative “internalities” that also need to be considered when designing a levy.
In a study published in the National Bureau of Economic Research, Hunt Allcott, Benjamin Lockwood, and Dmitry Taubinsky, note that when we consider externalities and internalities together, they estimate the optimal tax rate is about 1.5 cents per ounce, or at least 50 percent higher than most SSB levies currently imposed.
As you recall, SSB consumption is highest among low-income groups. One of the arguments lobbed against them is a claim of regressiveness. That is, opponents argue that the tax impacts the poor disproportionally. This argument does not hold up, however, as the levy’s positive internalities (better health, lower weight, longer life…etc) also accrue disproportionately to the same low-income groups.
This concern is further mitigated, as we suggested here, by using SSB tax revenue to help fund treatment for those with chronic or serious illnesses. This is known as “progressive revenue recycling” and ensures the progressivity of the tax.
Another concern is that should the levy be imposed, consumers will change their behavior and shift toward obtaining their sugar from other sources, such as sugary or carb-heavy foods, thus nullifying the effect of the tax. But research on existing SSB levies found virtually zero net substitution effects; the sugar “fix” provided by SSBs cannot easily be obtained any other way.
A Better Levy for a Better World
With that said, current SSB levies are flawed in that they are imposed per ounce of liquid. This makes little sense as it is the sugar, not the liquid, that is the cause of harm. Hunt Allcott et. al, suggest improving the levy by imposing it on the basis of sugar content alone.
With this tweak, it is estimated that the levy will be at least 43 percent more effective than the current methodology, and help the world lose nearly 200 million pounds. It stands to reason that a leaner, healthier population will also see lower healthcare costs, longer life expectancies, longer healthy life expectancies, higher productivity, and better economic growth.
The concept of an SSB levy is not generally popular, but the logic is undeniable. While preserving the freedom of choice, we could greatly reduce the prevalence and intensity of expensive and debilitating chronic ailments like cancer, heart disease, and diabetes. This would be of great benefit to an aging world on the precipice of population collapse. It would act as a small nudge toward a healthier and more sustainable future.