Tax on sugary soft drinks

A few years ago, I looked at the arguments for and against a tax on ‘fatty foods‘. Generally, I supported the idea of a tax on unhealthy foods because it is a way to price the full social cost of the good. It is an example of a Pigovian tax. A tax which internalises the external cost of the good.  Recently, the Academy of Medical Royal Colleges has produced a report stating 10 factors that could help reduce the UK’s obesity epidemic. One of these is an experimental 20% tax on sugary soft drinks.

A new study claims a 20 per cent tax on sugary drinks would reduce the number of obese adults in the UK by 180,000, bring in £276m to the Treasury and save the NHS millions.

The logic behind the new tax.

  • Higher price will reduce demand and make ‘healthier alternatives’ more attractive.
  • Over time, the higher price may change peoples spending and eating habits.
  • The sugary soft drinks create an external cost – of contributing towards obesity. Since obesity has external costs, the tax is making people pay the full social cost. It is the same principle as taxing petrol so people pay the social cost of congestion and pollution.
  • You could also argue sugary soft drinks and other unhealthy foods are a demerit good. People don’t know (or ignore) the damage to health. Making them more expensive discourages the consumption of these demerit goods.
  • If the tax is on volume, it may encourage people to enjoy smaller sizes.  Then people can enjoy without drinking to excess. e.g. the free refill is a popular marketing tool, but encourages consumption to excess. But, could a tax stop free refills?
  • It could raise up to £0.3 billion. This £0.3 billion could be used to lower other taxes, such as VAT or it could be used to increase spending on the NHS or specific obesity units.

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Global warming and tax cuts on petrol

The other day, I had a quick glance at the newspaper headlines, whilst in a service station.

  1. UN Report on global warming states global warming is a real threat to the future of the planet. To contain these changes will require “substantial and sustained reductions of greenhouse gas emissions”.
  2. Chancellor announces yet more freezes on fuel duty.

It seemed a paradox to have both headlines on the same day. At the very least, we could enable a small increase in tax on fossil fuels causing the problem.

Rising sea levels will be more damaging that a few pence on the price of petrol

Costs of global warming

In the summary of the UN document on global warming.

  • The report states that for a doubling of CO2 in the atmosphere, the increase in the global temperature is forecast is to be 1.5C to 4.5C.
  • The scientists say that sea level rise will proceed at a faster rate than we have experienced over the past 40 years. Waters are expected to rise, the document says, by between 26cm (at the low end) and 82cm (at the high end), depending on the greenhouse emissions path this century. (BBC link)

Political benefits of tax cuts

The chancellor has announced more freezes on fuel duty because it believes it will be politically popular. He is probably guessing that concern over the cost of petrol is greater than concern over the future of the planet.

Tragedy of the Commons

This situation could be classed as a classic example of the tragedy of the commons. People pursuing their self-interest but ignoring the common shared resources – leads to a loss in economic welfare. The problem is that with many individuals maximising their short-term welfare, there is a high cost to the future sustainability of the common resource.

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Impact of tax avoidance by Amazon

Directors of big multinationals such as Amazon, Google and Starbucks received a challenging investigation by MPs annoyed that big multinationals are avoiding paying corporation tax. An Amazon director was described as being ‘deliberately evasive’ and being unacceptably ignorant of who owned the Luxembourg based Amazon company – used to avoid UK tax. According to Conservative …

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Is the UK tax system fair?

Readers Question: Assess the effectiveness of the UK’s taxation structure in terms of reducing inequalities, negative externalities and unemployment.

Some of the UK’s tax system is progressive. A progressive tax takes a bigger % of income from higher earners. The UK’s income tax system is progressive. In 2012-13, the tax threshold will be over £8,100 This means people on low income, pay zero income tax. For people earning over £34,000, they will pay a marginal tax rate of 40%. For earners over £150,000 there is a marginal tax rate of 45%

The system of marginal tax rates means that the average tax rate increases the more you earn. You only pay 45% tax on income over £100,000.

National insurance is also quite progressive as it takes a % of your income. However, with national insurance there are upper limits so you don’t have to pay tax on income above that. Income and NI taxes account for 50% of total tax revenue. The government have admitted that the combination of income tax and NI makes it unnecessarily complicated. A commission will be looking at merging the two.

However, although the income tax system is progressive, other taxes are more regressive.

At 20% VAT tends to be more regressive. People on low income have a higher marginal propensity to consume. Therefore, the VAT they pay is a higher % of their total income. People on high income will spend more and will pay more VAT, but they will have a lower marginal propensity to consume (People on high incomes can afford to save a higher % of income). Therefore, VAT will be a smaller % of income spent. The regressive nature of VAT is slightly compensated by the fact that in theory, necessities like food (e.g. cold pastries, cabbages) don’t have VAT. VAT is supposed to be targeted at luxury goods.

Other taxes like excise duties on cigarettes are much more regressive. Smoking rates tend to be higher amongst people with lower incomes. Also, it will be a much bigger % of income than for rich smokers.

Tax revenue



government tax revenue

Council Tax can also be quite regressive and arguably unfair. People living in expensive areas end up having high housing costs, but also a higher council tax band. Arguably a fairer method of collecting local tax would be a local income tax.

Another problem with the UK tax system is the scope for having offshore accounts and avoiding paying tax through tax avoidance schemes.  Tax avoidance is often easier by people with high incomes. Offshore tax avoidance

The Mirrless report by Institute of Fiscal Studies argued that the UK tax system was costly, ineffective and complicated. Guardian link

Although, the Tax Justice movement were critical of this Mirrless report.

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