Should We Sugar and if so How?

“The science is in: the case for a sugar tax is overwhelming.” Robert Lustig, The Guardian, 27 October, 2015. “This [a sugar tax] is one of those suggestions we always thought was bonkers mad…” Barnaby Joyce (as reported in The Age, 24 November 2016)

1. Introduction There are increasing calls in Australia for a tax on sugar or sugary products, especially sugar- sweetened-beverages or SSBs (or “soda ” as they are known in some countries). A number of health organisations (including the AMA, Diabetes Australia and the Australian Dental Association1) and numerous public health experts have called for a tax on sugary drinks and products. More than 20 countries have introduced a tax on sugary drinks (for example, Mexico, the UK, Ireland and France) and, in the USA, more than one half of the States and some cities (such as Philadelphia and Berkeley) tax sugary drinks. Norway has had a long-standing tax on sugary products. Within Australia, the proposal of a new tax on sugary products is controversial. One political party, the Greens, has advocated a 20 per cent tax on SSBs. The present Commonwealth Government and the Labor Party are opposed to a tax. Some economists question the desirability of a new tax on sugary products on the grounds it may not be cost-effective.

Accompanying these calls for a new tax, there has been a number of empirical studies in Australia of particular proposals for a tax on SSBs, all of them by health scientists and health economists or economists working for health research centres/groups. The Australian publications we review begin in 20142 and broadly follow overseas studies, particularly those in the USA, which were inspired by earlier actions in individual States and cities of the USA and by the experience of Mexico which was the first nation to introduce a tax on soft drinks in 2013. Collectively these studies provide considerable information about SSB consumption and the possible effects of a tax on consumption of SSBs and the health benefits of reduced consumption. However, the taxes proposed are all different and the models and data used also differ in important ways. There is, moreover, a number of aspects of the tax and its effects on behaviour which have received no or scant attention in Australia. 2

In this paper we review the growing Australian literature on the topic of a tax on sugary products. In doing so, we accept as a fact that excess consumption of sugar is a health hazard which affects adversely the health of some consumers. Moreover, we do not attempt to measure the costs of health treatment (or other external costs). These are tasks for health experts. Rather we seek to extract from this literature what we have learned about designing a tax on sugary products and to recommend public health policies, including the possibility of a tax, which are best designed to improve national health and economic welfare. We do not examine the difficult politics of introducing new taxes on sugary products.

Section 2 examines the rationale for a tax. Section 3 considers the set of goods to be taxed, Section 4 the tax base and Section 5 the , including the problems of evaluating the costs and benefits of a tax. These are the traditional dimensions of analysis of a commodity tax. (The choice of jurisdiction has not arisen but it may if the Commonwealth continues to refuse to introduce any tax on sugar or sugary products, and then some individual States decide to do so. The best choice is straightforward. Any tax should be a tax levied by the Commonwealth, not the States. The problem is nationwide and calls for a uniform tax.) The conclusion contains our recommendations for a UK style tax

2. The Rationale for a Tax Table 1 lists the empirical studies done in Australia on proposals for a tax on SSBs or sugary products. This table updates and modifies a table in Duckett, Swerissen and Wiltshire (2016, Table 4.1).3 It also lists important features of each study.

[Table 1 about here]

Our analysis begins with the choice of the objective or the objective function which a proposed tax is intended to achieve or maximise. This is a key feature of each proposal as it indicates what the authors seek to achieve by the introduction of a tax. The studies differ considerably in terms of the choice of objective or objective function, as shown in Table 1. Some of these tax proposals have as their objective simply the reduction in the consumption of sugar or sugary products – for example, Sharma et al. (2014). Some have a specific health objective, such as optimising the net monetary benefits of reduced disability-adjusted life years in the case of Cobiac et al. (2017), while Lal et al. (2017) weigh tax proposals in terms of their cost-effectiveness. 3

We accept that the consumption of sugar or sugary products is on average, excessive from the point of view of maintaining good health. WHO Guidelines (2015) recommend that adults and children reduce their daily intake of free sugars to less than 10 per cent of their total energy intake, with a further reduction to less than 5 per cent providing additional health benefits. It is also recommended that adults reduce their sugar consumption to less than six teaspoons per day, which is less than half their current consumption in Australia. ABS (2016) reports aggregate nation-wide figures for the consumption of added sugars and free sugars in Australia in 2011-12. According to this survey, the average Australian consumption of free sugars was 60 grams (15 level teaspoons) per day. The survey found that 52 per cent of Australians exceed the WHO recommendations. For children and teenagers, the situation is much worse; almost three quarters of 9-18 year-olds exceeded the WHO recommendations.

Consumption of sugar at high levels increases the risk of a number of diseases or health complaints; the three which receive most attention are Type 2 diabetes, obesity and tooth decay. As one example of the state of the health of Australia’s population, an often- quoted figure is that, in 2014-15, 63.4 per cent of Australian adults were obese or overweight; this figure comes from the National Health Survey conducted by the Australian Bureau of Statistics (2015). The view that high levels consumption of sugar pose major health problems for many persons in Australia has led health professionals and health economists to advocate taxes on sugary drinks or products as a measure to improve health.

The last column of Table 1 reports the main effects of the tax proposed in each study. It concentrates on the central health effects relating to the estimates of the reductions in the aggregate consumption of SSBs and/or body weight. More detailed results are available for individual groups in some studies; these relate to subpopulations defined by income group, moderate or high consumers, men and women or age groups. While comparisons are difficult because authors differ in terms of the measure of health gains chosen as well as the type and level of tax, they all report significant health gains. All of these studies have made recommendations for some form of tax on SSBs.

However, economists conventionally view these taxes as proposals for a which is intended to correct some market , rather than proposals to improve selected measures of health. In the case of sugary products, the externality is chiefly the public sector costs of treatment of sugar-induced ill health such as diabetes Type 2 and 4 obesity. These are costs which rise from excessive consumption of sugar or sugary products by some individuals but are borne by taxpayers or other individuals. (For discussion of external costs, see Freebairn (2010, Section 2.3) and Duckett, Swerrisen and Wiltshire (2016, Section 2.1.2).) Of the Australian empirical studies Duckett, Swerissen and Wiltshire (2016) alone approach the choice of a tax on SSBs within a Pigovian framework. The argument for a commodity tax on sugary products is essentially the same as that used to justify taxes on alcoholic beverages and on tobacco and tobacco products. These are the so-called ‘sin taxes'. A Pigovian approach requires, for each tax proposal, the measurement of the savings in the cost of the externality and other identifiable costs and benefits of a tax.

The Economics literature is divided on the merits of Pigovian type taxes. On the one hand, Pigovian taxes have been widely recommended by economists in the United States and other countries but, on the other, some economists and other critics regard corrective taxes as poor instruments which may do more harm than good. (For a general review of this literature on Pigovian taxes, see Fleischer, 2015.) The literature has come to emphasise that all externality problems are different and many are complex.

In particular, this literature shows that there is a problem in designing a Pigovian tax if it is to lead to an improvement in national welfare. If the tax is not carefully designed, it may not achieve the objective or it may impose high incidental costs on consumers and other groups. Fleischer (2015, p. 1703) opines that a Pigovian tax is inefficient and inappropriate for food (which would include those arising from sugar consumption) because of the heterogeneity of consumers. He mentions specifically the harm imposed on persons who consume a 'safe' volume of food products generating externalities and the low elasticity of demand characterising heavy consumers.4 Dubois, Griffith and O’Connell (2017) also question the targeting of soda taxes; they emphasise that soda taxes do less to reduce the consumption of sugar of those with the most sugary diets because of their low price elasticity of demand. For Australian studies which discuss the design of Pigovian taxes, see in particular Clarke (2008) and Freebairn (2010), the former discussing taxes on and the latter taxes on obesity. For a design perspective from the point of view of behavioural economics, see Just and Gabrielyan (2016). Two recent articles in The Conversation echo these concerns. Veerman (2018) notes evidence from behavioural economics and from weight-loss trials and concludes that public policy which is based on the assumption that individuals are able to take personal responsibility for their decisions will fail. Markey- 5

Towler (2018) argues that 'sin taxes' are not effective in reducing obesity and advocates innovation as a way to help individuals improve their diet.

Recently two additional arguments have been advanced to justify the introduction of a tax. These are the “internalities” argument and addiction. They are reviewed in Section 5. The internalities argument is difficult to implement and there are no Australian studies of addiction to SSBs. Consequently we concentrate on the externalities argument for a tax on SSBs.

3. Choosing the Goods to be Taxed There is a choice here of taxing the consumption of all categories of food and beverages which are believed to have adverse external effects when consumed in excess quantities or, more narrowly, of all sugary products (as somehow defined) or, still more narrowly, of taxing particular sugary products such as SSBs. Some health experts or groups in Australia have proposed a tax on a wide range of food products. Cobiac et al. (2017) recently proposed a tax on saturated fats, salt, the sugar content of foods and of SSBs, which are described as “unhealthy foods and drinks”, either singly or in combination. They also propose a subsidy on fruit and vegetables, “healthy” products. It is difficult to implement and to evaluate the effects of a tax which applies to such a diverse group of products. One of the authors, Tony Blakely, himself advised a gradual approach, beginning with a tax on SSBs because taxing this product sub-group “already has some community support” (ABC News, 15 February 2017). We restrict the scope of our review to proposals to tax sugar or the sugar content of foods and drinks. To decide the choice of what sugary products to tax, we need information on the quantity of consumption of sugary foods and SSBs and the sugar they contain.

First, we need to consider what exactly is “sugar”? The Australia New Zealand Food Standards Code provides a definition. The basic forms are glucose, fructose and sucrose. Other forms and sugar syrups are included in the definition but honey, fruit juices and fruit juice concentrates are not. The product group of interest corresponds to what are known as “added sugars”, that is, sugars and sugar syrups that are added to foods and beverages during the manufacture of foods and beverages or in their preparation. It is this group which is the concern of health advocates. (For some discussion of definitional issues, see ABS (2016) and Tan (2018)). Sometimes, the discussion and statistics refer to “free sugar”. This term extends the definition of added sugars by including sugars naturally present in honey, fruit juices and fruit juice concentrates. 6

There is an obvious argument for taxing the sugar content of all foods and drinks. It is the sugar consumption from all forms and sources that damages the health of some individuals. Taxing only SSBs is like taxing only beer and not liquors and wine. For example, confectionery and chocolates are a major source of excess sugar consumption. Breakfast cereals, “Treats” and lollies given to children are also a major source of excess sugar consumption for this age group. Counting against this proposal, however, is the difficulty of drawing the boundary for such a broad product group and of modelling the effects on all components of the group. Moreover, this proposal would impose large compliance costs on manufacturers who would have to test and certify the sugar content of all sugary foods and drinks. And who would certify the sugar content of imported sugary foods and drinks?

An alternative is to tax sugar milled in Australia by means of a sugar tax coupled with an equal import on sugar imported in a raw or refined state. This would be much simpler and impose much lower compliance costs than taxing the sugar content of foods and drinks because there are only four sugar refineries in Australia. It would obviate the need to test and certify the sugar content of foods and drinks manufactured in Australia. Imports of sugar could be taxed on entry. This tax would not, however, cover the sugar content of processed foods and drinks imported into Australia. To do so would require testing and certification of imports.

The proposal which is least ambitious in terms of commodity scope is a tax on SSBs. While this tax would not cover the sugar content of foods, the sugar content of sugary drinks is a major component of total sugar consumption. This is the option most widely considered in Australia.

Information on the sugar content of sugary products is available from several sources. With respect to the sugar content in “sugary drinks”, Table 2 reproduces a table provided by Rethink Sugary Drinks (2018). This provides the sugar content of a variety of popular drinks in terms of the total per serve (bottle), grams/100 mL and also sugar per serve measured in level teaspoons. The second measure is necessary to standardise the content because the quantity of drink in the drink bottles cited in this table range from 375 mL to 600 mL. Several of the sugary drinks in this table have over 10 grams/100 mL. Duckett, Swerissen and Wiltshire (2016, p. 58), after reviewing the published evidence, use an average sugar content of 9.27 grams/100 mL in sugar-sweetened beverages. The third measure is perhaps the most 7 valuable to consumers because the number of level teaspoons in a serve is much more easily understood by most consumers than grams per 100 mL. The Calorie King website provides more detailed data on the calories, fat, sugar and other nutritionally important measures for over 19,000 Australian generic and brand name foods, including a wide range of soft drinks, mineral waters and water.

[Table 2 about here]

Some writers note that Australians are among the highest consumers of SSBs in the world (e.g. Sharma et al., 2014, p. 1160 and Rethink Sugary Drinks, website, 2018). There are several estimates of the average consumption of SSBs by Australian households but these use different sources and the estimates vary considerably. There are two sources that provide data useful for our review; the ABS Health Surveys and AC Nielsen.

In a one-off Health Survey of the Apparent Consumption of Selected Foodstuffs, the ABS compiled statistics of the apparent consumption of “aerated, carbonated and mineral waters” per person up to 1997-98 (ABS, 1998). “Aerated, carbonated and mineral waters” are roughly equivalent to soft drinks, one of the drink groups which make up SSBs. Duckett, Swerissen and Wiltshire (2016, p. 26), citing these ABS statistics, state that by the 1990s Australians consumed an average of 113 litres of these beverages per person per year. This equates to almost one 375mL bottle of SSBs per person per day.

The ABS Health Survey: Consumption of Added Sugars compiled statistics of consumption per capita of “soft drinks, cordials and fruit juice drinks” in 1995 and again in 2011-12 (ABS, 2016). The data used in this report are derived from a database developed by FSANZ which comes from two days of dietary recall data by a sample of respondents (Australian Bureau of Statistics, 2016, Explanatory Notes). The data, however, are reported in the form of the proportion of total free sugar consumption which comes from these drinks. There was a decline in the consumption per capita of these sugary drinks over the period spanned by the two surveys, due to a reduction in consumption by children aged 2-18. Using data obtained from AC Nielsen grocery sales surveys over the period 1997 to 2011, Levy and Shrapnel (2014) confirm this trend and conclude that “The water-based beverage category is undergoing a fundamental shift from sugar-sweetened to non-sugar drinks.”, which they attribute to increased health consciousness. We do not know if the trend has continued as there has been no ABS Health Survey of Added Sugars since 2011 and AC Nielsen does not publish these statistics. 8

AC Nielsen Home Scan Consumer Panel is a panel data base of household purchases from a sample of households which use a barcode scanner for all purchases from supermarkets, convenience stores and pharmacies. It does not cover purchases from non- scannable sources such as other shops, restaurants and cafes, fast food outlets, and vending machines. Hence data taken from the AC Nielsen source are an underestimate of the true levels of consumption of SSBs. We found no information on the relative magnitude of consumption from scanner and non-scanner sources in Australia. However, Dubois, Griffith and O'Connell (2017, p. 13) report that “A substantial portion of soda is consumed on-the-go; in the UK half of soda is consumed outside the home, the same is true in the US”. If the proportion of non-scanner purchases in Australia is anywhere near these levels for the UK and US, which seems likely, the Australian data taken from AC Nielson greatly underestimate the true total levels of consumption.

Annual data from this database of “soft drinks, cordials and fruit drinks” are used by Sharma et al. (2014) and by Etilé and Sharma (2015) in their empirical studies. Etilé and Sharma (2015, Table 1) calculate that the mean consumption per person of SSBs was 7.57 litres per month, or 90.84 litres per person per year in 2010. This estimate relates to the subsample of households with positive consumption of SSBs (the top six decile groups) which implies that the mean consumption across all households was substantially lower but, on the other hand, the exclusion of sales from some outlets underestimates the average consumption of the beverages.

On this evidence a reasonable estimate of average consumption of SSBs is around the level of 100 litres per year in the period 2010-12. This equates to a little less than one 375mL bottle of SSBs per person per day. It is about the same level of consumption as in the US and some European countries (Jou and Techakehakij (2012,Table 2) though the reporting years vary considerably across countries in this table).

Taking the average sugar content of SSBs at 9-10 grams/100 mL implies that, on average, Australian consumers are getting more than 35 grams (8 teaspoons) of free sugars daily from their daily consumption of SSBs alone. At this level of consumption SSBs contributed more than one half of the daily consumption of free sugars. This provides a strong justification for considering a tax on SSBs alone or perhaps, in a longer term, as the first part of a broader tax strategy. Henceforth we confine our review to the taxation of SSBs.

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4. Choosing the Base of the Tax To compare these proposals, we note that there are options for the choice of a tax base. A tax can be based on the value of the purchase or on the quantity purchased. In the standard terminology of economics, this is a choice between an or a specific tax. In the former, the tax is fixed as a percentage of the value and in the latter as a fixed amount for each unit of the good purchased. (In some of the empirical studies the latter is referred to as a volumetric tax.) If the tax is based on quantity, there is the further choice of the quantity of the good purchased or, in the case of SSBs, the quantity of the sugar content in the drink.

A tax with the value of consumer purchases as the tax base could be implemented as part of the GST tax system or as a of the type which Australia previously operated on selected goods before the introduction of the GST system. The other two tax base options would be a part of the excise tax system for goods produced in Australia (with an identical tax rate imposed on all imports of like goods, as in the case of other goods currently subject to excise taxation).

The answer to the question of a specific or an ad valorem tax depends inter alia on the objective being pursued through introducing the tax, as well as the assumed market structure in which the tax is applied. It is well known that, in a perfectly competitive single homogeneous good partial equilibrium market, an ad valorem tax and a specific tax generate the same outcomes for the quantity transacted, the price, the generated, and social welfare – provided they are applied at the same rate, that is, the level of the specific rate is set equal to the dollar amount of the ad valorem tax and vice versa. Thus, there is no need to make a choice between these two alternative forms of tax. When two policy instruments – in this case a specific tax and an ad valorem tax – have the same effects on the market they are said to be “equivalent”.

However, equivalence holds only under certain conditions. In the theoretical literature it has been shown that whether equivalence holds depends on the assumptions made about whether the good is homogeneous or differentiated, on whether the firms' strategic behaviour is based on quantity or on price, and on the curvature of the inverse demand function.5

First, the assumption of perfect competition may not hold. There are at least three reasons: first, food manufacturing firms tend to be imperfectly competitive; second, they produce differentiated products; and third, they are part of a value chain that extends from 10 sugar cane production, through crushing and refining, to incorporation of refined sugar in manufactured drink (and food) products which are sold to consumers through imperfectly competitive retailers. Thus, a sugar tax applied to drinks or food manufacturers will affect the entire supply chain. In particular, the extent of the tax pass-through to consumers of products that contain sugar is of critical importance to the efficacy of the tax. The pass- through depends on the strategic interaction between food manufacturers and food retailers and on the type of tax employed. Another possibility is that the tax may be passed backwards, at least in part, to the sugar mills or sugar growers.

Bonnet and Réquillart (2013) simulate a variety of taxes on soft drinks under different competition conditions. They concluded that if the policy objective were to reduce the consumption of sugar, then the specific tax applied to the sugar content was the best choice of the three tax schemes evaluated. It is well-targeted as it reduces sugar consumption by the most because it is over-shifted – the increase in the consumer price being 107 to 133 per cent of the tax – and it provides an incentive to consumers to shift to drink varieties with lower sugar content.

Second, the condition for equivalence of a single homogeneous product does not hold. There are many varieties of SSBs. Sharma et al. (2014) and Etilé and Sharma (2015) compare the alternatives of a specific and an ad valorem tax on SSBs in Australia. They carefully set the tax rates equal, as required. They find “…an [specific] excise tax has a higher impact than an ad valorem tax of similar ‘facial’ value. The main reason is that heavy drinkers are more likely to buy discounted (and often multipacks) SSBs. As these products are generally priced under 1 AUS$/l, an excise tax of 20 cts/l will produce a higher price increase than a 20 per cent ad valorem tax.” (Etilé and Sharma (2015, p. 19)).

We should consider here too the possibilities of a single rate or progressive multiple rates. In deciding which possibility to adopt, it is important to reflect that the fundamental purpose of the tax is to alter the behaviour of the manufacturers, of the retailers and of the consumers of SSBs. Manufacturers need to be encouraged to reduce the sugar content of their branded drinks; retailers need to pass on the tax-induced price increase as much possible given the market structure; and those who consume unhealthy volumes of SSBs need to reduce their consumption of sugar. For consumers, a UK study of the consumption of alcoholic drinks by Griffith, O’Connell and Smith (2017) found that heavy drinkers tend also to purchase stronger alcoholic drinks. We do not know if heavy drinkers of SSBs in 11

Australia also tend to purchase drinks with higher sugar content but, if it were true, the multiple rate form would target these drinkers better. A tax design which has progressive multiple rates is likely to have greater efficacy than a rate. However, it is not clear, given a continuum of consumers with respect to levels of consumption of SSBs, and several different quantities of added sugar per volume of SSB, how many tax rates is best and what each of the multiple rates should be.

The newly-introduced UK tax on SSBs, for example, has two rates – one rate of 18p per litre for total sugar content of more than 5 grams per 100 mL and one of 24p per litre for drinks with a total sugar content of more than 8 grams per 100 mL. With Coca-Cola in the UK having a sugar content of 11 g/100 mL, and currently having a wholesale price of 89 pence per litre (http://www.marfast.co.uk/drinks/coca-cola-products.html), the tax of 24p per litre is equivalent to an ad valorem tax of 40 per cent on the wholesale price net of the tax. The corresponding ad valorem tax on Fanta, which is taxed at 18 pence litre, is 20 per cent. For SSBs with 5 or fewer grams per 100 mL, the rate is zero. It is a which reflects the non-linear relationship between sugar consumption and harm to health. By announcing the tax two years prior to its introduction (6 April 2018), manufacturers were given time to change the sugar content of their brands in order to reduce their tax liability, an opportunity which they have taken (The Economist, 2018). Thus, altering the behaviour of manufacturers has succeeded to such an extent that the anticipated tax revenue, which is destined for sports programmes in primary schools, has now been more than halved. The effects of this tax on certain brands of SSBs are shown in Figure 1. It should be noted that the tax-adjusted levels of sugar in the less than 5 g/ 100 mL range are just below the threshold where the tax would apply. Brands such as 7-up have been reformulated with a sugar content that has been reduced from 11 g/100 mL to 7 g/100 mL while Fanta has a sugar content now of approximately 4.5 g/100 mL instead of approximately 7 g/100 mL.

[Figure 1 here]

With manufacturers of SSBs responding to the introduction of the sugar tax, consumers now have a wider choice of soft drinks in terms of sugar content, ranging from the unchanged 'flagship' brands of Coke, Pepsi and Red Bull, to the new, healthier brands with reduced sugar content. Manufacturers have replaced sugar to some extent with artificial sweeteners in some brands. Because some existing brands have a loyal consumer following, manufacturers have not replaced sugar with artificial sweeteners across all of their brands, 12 reflecting a response on the part of some consumers to continue to demand the drink with the unchanged recipe (The Economist, 2018). What is not yet known, however, is whether those consumers who continue to demand the 'flagship' brands are the heaviest consumers of SSBs. For consumers who are prepared to buy the reduced sugar SSBs, sugar consumption per head will fall in line with the public policy objective.

5. Choosing the Tax Rate – the Benefits and Costs of a Tax on SSBs Any prediction of the effects of a tax requires a model of the market for the good or goods concerned. In addition, the choice of the level of the tax depends on whether government is pursuing an efficiency or an equity objective in introducing the tax.

5.1 The Demand Side of Models of the SSB Market Consider first the demand side of the model. Most of the models treat sugary drinks as a single product and use a partial equilibrium model of the one market for this product. In effect, this is treating sugary drinks as a good which faces a single undescribed general substitute.

From the theory of consumer demand, the obvious way to model the demand side is to postulate a group of drink products, including SSBs as one member of the group, from which a consumer makes a choice when deciding to have a drink. This group should exclude alcoholic beverage as the decision to drink an alcoholic beverage is a different decision made in a different context and with a different purpose of socialising or of drinking alcohol. Using the standard rational model of a utility-maximising consumer subject to a fixed budget constraint, we can represent this postulate by a utility function which has the added restriction of being weakly separable in a product group, which we can call “drinks”:

d Ux(1 ,..., xn ) Vx ( 1 ,..., vx ( d ),..., x n ) where there is a total of n goods over which the budget is spread and a sub-group of k < n

d drink goods which have a quantity index v . The argument of this function (xd) = (xd1,…, xdk) is the vector of consumption of the drink goods. It is known that, under certain not-very- restrictive assumptions, utility can be maximised in two stages (see Deaton and Muellbauer, 1980, chapter 5.2). At the first top-level stage the consumer chooses the quantities and expenditure on the product group. At the second stage the consumer then chooses the level of consumption of individual drinks, given their individual prices and the expenditure on the

d whole group. The function v( xd ) acts as a sub-utility function. We have, therefore, a utility 13 maximisation problem just like the standard problem but one restricted to a sub-group of goods. This is a very convenient device to model the demand for a group of drinks as a stand-alone group.

This is the approach used by Sharma et al. (2014) and Etilé and Sharma (2015) in their empirical studies of the effects of a tax on SSBs. Sharma et al. (2014) use the Almost

Ideal Demand System to represent the function v d and consider the impact on three groups of households – low income, middle income and high income. Their careful study yields a matrix of own- and cross-price elasticities of demand for 10 different kinds of drinks, three of which are SSBs (non-diet soft drinks, cordials and fruit drinks) and the other seven are non- SSB alternatives (diet drinks, bottled water, fruit juices, high-fat milk, low-fat milk, tea and coffee) Sharma et al. (2014, Table III). These can then be used in the estimation of the effects of a tax. [Table 3]

They find that the own-price elasticities for individual drinks vary around unity and many of the cross-price elasticities between SSB drinks and other drinks are positive indicating they are substitutes. Etilé and Sharma (2015) similarly treat a group of 8 beverages as a group separable in the utility function of the consumers.

An alternative specification of the consumer's utility function has recently been advanced by health economists and health experts as a justification for policy action (see Dubois, Griffith and O’Connell (2017) and references therein, and Griffith, O'Connell and Smith (2018)). It rests on a new concept of ‘internalities”. These experts believe that some consumers do not fully account for the future costs to themselves of excess consumption. It may be that consumers are imperfectly informed about what constitutes a healthy diet; it may be that they are unaware of the future and possibly irreversible damage to their health of eating unhealthily now, i.e. the quality-adjusted-life-years that are lost; but it may be that consumers recognise these years lost but they lack the self-control necessary to avoid them because they are addicted to products containing sugar. All of these explanations undermine to some extent the assumptions of the standard model of constrained utility maximisation outlined above.

In this alternative model, the consumer has two utility functions, an experienced utility function and a choice utility function. The experienced utility function accounts for the utility from consumption together with the harm done to the consumer by consuming a 14 good that creates an internality as well as the external costs incurred by society by consumption of that good. On the other hand, the choice utility function allows the consumer to be aware of self-harm and to adjust consumption accordingly.

Specifically, following the specification used by Marron (2015), the experienced utility function can be written as

UE  Uxz(,)  Ix () E ()x where: U(x, z) is utility from consuming goods x and z; x is consumption of SSBs; z is consumption of all other goods; I(x) is the self-harm experienced by the consumer from SSBs, with I'(x) > 0; x is a vector of the consumption of x by each consumer; and E(x) is the externality caused by consumption of SSBs.

If consumers lack information on the harm that consumption of SSBs does to them, or if they have only limited self-control over the level of consumption, perhaps because of addiction to sugar, then their consumption decision depends on their choice utility function

UUxzC (,)  (1 )() Ix where  (0 1) is the fraction of harm that the consumer does not take into account. If  = 0, then the consumer is fully informed and takes full account of the harm done from consuming, but for  > 0, the consumption choice of SSBs is sub-optimal in the sense that harm to the individual is being partially ignored. If  = 0, then maximising UC subject to the budget constraint gives x* as the optimal level of consumption. On the other hand, if  > 0, then optimal level of consumption is x**, where x** > x*. A corrective tax will reduce x** by an amount that depends on the consumer's price elasticity of demand.

If the internality is caused by lack of information, this raises the question of how well informed are Australian consumers of SSBs? The answer is not as well as they could be. The Nutrition Requirements system requires that the quantity of prescribed nutrients be declared on foods sold in Australia, including SSBs.6 In the case of SSBs, these state the sugar content in terms of the content per 100 mL. This enables careful buyers to assess the quantity of sugar but the icon is not front-of-package and is often in small print.

Marron stresses the point that any tax that is introduced to deal with the internality must be based on the cost of the harm that the consumer ignores and not on the total cost of the harm, i.e. it has to be based on I( x ) and not on I(x). In this respect it differs from an externality where all of the external costs are imposed on others. Marron goes on to highlight 15 the practical difficulties caused by having to set the tax based on the proportion of the costs of the harm which are ignored by the consumer, difficulties which are greatly exacerbated when consumers are heterogeneous with respect to their levels of consumption and to their responsiveness to the tax-induced price increase. This heterogeneity leads Marron to conclude that other measures which influence consumers' behaviour, such as the provision of useful information, would be preferable to an internalities tax.

There is a third possible specification of the demand side of the model which is based on the recognition that sugar is an addictive product (see Reichelt, 2018 and Duckett, Swerrisen and Wiltshire, 2016, p. 21). In Australia there have been empirical studies of drugs and alcoholic beverages using models which have treated the products consumed as addictive goods but there have been none, to our knowledge, of SSBs or sugary products. This is a need for a model of addictive behaviour in the SSB Market in Australia.

5.2 The Supply Side While almost all the discussion in Australia has been devoted to the consumer response, we must also consider the producer response. Four of the six empirical studies we have examined aggregate SSBs into one single aggregate good. The other two introduce a small number of types of SSBs. All six assume that the producer price of the one good or of individual types of SSBs are fixed, that is, do not change when a tax is introduced. With these assumptions, there is no need to model the supply side.

However, these assumptions are unsatisfactory for two reasons. First, there may be some imperfect competition among suppliers. Second, there are many different types of SSBs and within the usual categories there are many product varieties with different sugar contents.

Imperfect competition introduces the possibility of strategic interactions amongst individual manufacturers of SSBs. That interaction can be based on price or on advertising or on product differentiation, e.g. the sugar content and taste. It also introduces the possibility of strategic interaction between imperfectly competitive manufacturers and imperfectly competitive retailers. Both give rise to a much more complex model than that of perfect competition and one that would require detailed knowledge of that interaction within each group of firms and between these two groups. The interaction between these groups was modelled by Bonnet and Réquillart (2013) for France. We are not aware that such a model 16 has been estimated for Australia. We note that, at the retail stage of sales via supermarkets, there are two dominant suppliers, Coles and Woolworths.

The existence of product varieties introduces new possibilities of producers introducing to the market new varieties with a lower sugar content. Some suppliers have already responded to public concerns over the high sugar content of SSBs, as described above for the UK, by bringing in new varieties with lower or even zero sugar content. For example, Coca-Cola introduced Diet Coke in 1982 and Coke Zero in 2005, each of which has zero calories and is sugar-free (https://www.coca-cola.co.uk/faq/difference-between-coke-zero- and-diet-coke). While such varieties make a useful contribution to reducing the aggregate sugar intake of heavy SSB drinkers, they contain artificial sweeteners, and there is some evidence that these too may also pose a risk to health (Zhang, 2018).

This view of markets has an important consequence for predicting the effects of a tax on SSBs on the consumption of the sugar contained in them. The reduction in sugar consumed through the consumption of SSBs following the introduction of a tax on the sugar content of SSBs would come about in two ways – a reduction in the volume of SSBs consumed and the substitution of SSB variants with a lower sugar content per litre. The second means that, even if the reduction in the aggregate consumption of SSBs is zero or small, there may still be significant reduction in the aggregate sugar consumed by drinking SSBs.

5.3 Combining Demand and Supply For a given specification of the demand and supply sides of the model, the choice of tax rate or rates should ideally be based on an analysis of the costs and benefits of alternative rates. The economist’s approach to this problem is to calculate the net value of the benefit from reducing external costs less the loss of consumer surplus plus the change in producer surplus, if suppliers are perfectly competitive, or in suppliers' profits, if imperfectly competitive, plus fiscal effects of a given tax. Freebairn (2010) provides an excellent and clear introduction to this approach under the assumption of perfectly competitive suppliers. He produces a basic economic model for the analysis of a tax on energy-dense foods as a method of reducing obesity in Australia but the model can be applied equally to sugary products.7 A key feature of the model is that it allows for heterogeneous consumers. In the context of a tax on SSBs, this means we have some consumers who consume SSBs in excess and impose costs on the 17 public health system and others who do not consume the products in excess. This is an important part of the modelling of the market.

For each consumer, there may be a difference between the marginal private benefit from the consumption of a unit of the good and the marginal social benefit. This difference is the marginal imposed on others in society (chiefly the costs of public health care caused by the individual). These differences cause the aggregate consumption of the good to be greater than that which is socially optimal. A corrective Pigovian tax should ideally be set for each individual at a level equal to the individual’s marginal social cost of consumption. This tax will reduce the individual's consumption and thereby reduce the imposition of costs on other members of society.

The problem here is that, in a model with heterogeneous consumers, their individual marginal social costs of consumption will differ. The marginal social cost will be zero for consumers who do not consume in excess. It will be positive for consumers who consume the product in excess and whose health problems are paid for, at least in part, by the government. However, an individual-specific tax is infeasible. The only possibility is to levy a tax which is uniform across the whole population of consumers of the product. Such a tax imposes a cost on the individuals who do not consume in excess and who have done nothing to harm other members of society. Economists measure this by the loss of consumers’ surplus for these individuals.

Most of the studies listed in Table 1 either ignore completely the effect on consumer welfare of the increase in consumer taxes that inevitably follows any proposal to impose a tax on SSBs, or they mention it only very briefly. The exceptions are Sharma et al. (2014) and Etilé and Sharma (2015). They calculate the “tax burden” of their taxes. Sharma et al. (2014, p. 1177, n. 7) define it as the “additional cost of beverage attributed to a SSB tax”. They measure it, for each household, as the product of the price increase and the average consumption of the household. However, their concept of a tax burden does not correspond to the economists’ concept of the of a price increase. The only study to consider the deadweight loss of consumer welfare is that of Lal et al. (2017).

Choosing a uniform tax rate involves weighing the benefits of the tax in the form of reduced external costs against the costs imposed on consumers, both those who do not contribute to these costs and those who do, as well as the costs imposed on suppliers. This is a complex calculation. The marginal social cost of consumption is positive for all values of 18 aggregate above a threshold level because each increase in aggregate consumption makes some already unhealthy consumers more unhealthy and it will bring some new individuals into a health situation that imposes costs on others. The social optimum occurs at the level of aggregate consumption where the tax rate is equal to the aggregate marginal social cost of the externality. This will reduce consumption and thereby reduce the imposition of costs on other members of society.

An has certain properties which give important insights into the design of a tax to correct an externality. The optimal tax will not in general reduce these social costs to zero. A tax should be introduced if and only if the net value of the benefits and costs is positive. It is important to note here that the optimal level of a uniform tax may be zero; this is called the “zero option” by Fleischer (2015).

5.4 The Pincus Critique The economists’ approach to measuring the optimal tax can be illustrated by examining Duckett, Swerissen and Wiltshire (2016). The publication of this paper produced a sharply critical response from Pincus (2018).8

The Pincus critique is based on the Freebairn basic model. Pincus correctly draws attention to the fact that Duckett, Swerissen and Wiltshire (2016) ignored completely the loss of consumer surplus, both for consumers who do not consume in excess9 and those who do. But all three papers also ignore the loss of producer surplus caused by the tax because each makes the rather extreme assumption that the marginal cost function is horizontal. Pincus’s back of the envelope calculations on the effects of the tax proposed by Duckett, Swerissen and Wiltshire suggest that the loss of consumer surplus almost offsets the gain from reducing the public sector health costs, that is, the net benefit of the tax is close to zero. Pincus also factors in to this calculation of the net benefit the reduction in the deadweight loss of the taxes which are required before the introduction of an SSB tax to fund the public sector costs of treatment of the obese heavy drinkers, and the gain from increased employment of the obese. With these additions, the net cost is positive but it is small.

The Pincus critique provides a salutary warning of the dangers of jumping to the conclusion that the existence of health problems, even if presented in the form of health costs borne by others, necessarily justifies a tax. However, the Pincus calculations do not provide a definitive estimate of the net benefits of a tax in a model with heterogeneous consumers and, 19 potentially, imperfect competition amongst manufacturers and retailers. There are omissions or errors in the estimation of both the costs and the benefits of a tax.

On the side of the benefits of a tax, Pincus (and Duckett, Swerissen and Wiltshire (2016) too) err in limiting the external costs of the consumption of SSBs to the costs of treating obesity, thereby ignoring the public costs of treatment of Type 2 diabetes, tooth decay and other health complaints stemming from or aggravated by sugar consumption. Therefore, they underestimate the net benefits of reducing sugar consumption. Unfortunately, we do not have estimates of the public cost of treating other diseases and complaints and, therefore, cannot estimate the average social cost, let alone the marginal social cost, of these diseases.10 Cobiac et al. (2017) estimate the effect of taxes on SSB on the savings of cost of public treatment for a variety of diseases but they do not report the figures and they do not cover tooth decay.

On the side of the costs of the tax created by the loss of consumer surplus, one key parameter in the Freebairn model is the proportion of aggregate consumption of SSBs which is made by moderate drinkers. This parameter is an indicator of the extent to which a tax on SSBs imposes incidental costs on consumers who do not generate external costs on other members of the society. Pincus guesses that it is one half of total consumption.11 We do not know this number but we can surmise it. As reported in Section 2, roughly one half (52 per cent) of Australian residents exceed the WHO recommendations of free sugar intake. Take this group as the group of heavy drinkers. Each of these is, by definition, consuming much more per person than the moderate drinkers. Assume that each of the heavy drinkers drinks on average, say, twice as much per day as the moderate drinkers. This is a rather conservative guess. Then, under this assumption, the percentage of total consumption accounted for by the moderate drinkers is only one third, not one half.

This parameter also affects the estimation of the aggregate deadweight cost of the tax to consumers, both light and heavy consumers combined. If the own-price elasticity of demand of heavy drinkers is less (greater) than that of light drinkers, these costs are under- (over-) estimated by assuming a single elasticity parameter. Etilé and Sharma (2015) examine the price response of consumers across the whole distribution of SSB consumption by individuals in terms of litres per capita per month. They find that the own-price elasticity of demand decreases monotonically with the level of consumption. Hence, the heavier consumers do have lower price elasticities.12 This is what one would expect if sugar has 20 addictive properties. Consequently, in this respect, Pincus underestimates the loss of consumer surplus.

The Freebairn/Pincus model is still too simple to determine the optimal tax on SSBs. There are a number of other features of the market which need to be added.

First, there is a further change in consumer surplus if we model demand as a demand for a group of closely related substitutes, not just for one product as they do. This requires the concept of the generalised consumer surplus which was well developed in the theory of consumer surplus several decades ago (for a textbook discussion, see Ng (1983, chapter 4)). For illustration we might present a two-good model of the demand for drinks, one drink being SSBs and the second a close substitute. In this case, the existence of a substitute means that the increase in the market price of SSBs after the introduction of a tax on SSBs shifts outwards the demand for the substitute drinks good which is not taxed. If the price of this good is also fixed, it increases the consumer surplus of consumers of this good, thus reducing the consumer loss in the market for drinks as a whole.13

Second, Pincus and Freebairn model a based on the quantity of the product consumed. If instead, the tax is based on the sugar content, it gives consumers an opportunity to switch to other variants or brands with a lower sugar content, for a fixed volume of SSBs consumed, and it gives suppliers an opportunity to introduce new varieties with a lower sugar content. The tax also gives producers an incentive to substitute non-sugar artificial sweeteners which do not have the calorific and metabolic effects of sugar. Taken together, the errors and omissions of the Pincus calculations almost certainly underestimate the net benefits of a tax on SSBs, perhaps by a large margin.

5.5 Setting the Tax Rate With this understanding of the economics of a tax on SSBs, we can return to the central question of setting the tax rate optimally to maximise the net social benefits of introducing a tax. Now we can take the optimal form of the tax as a two- or multi-part specific tax based on the sugar content of SSBs. We acknowledge that we do not know the optimal tax rates on the sugar content of SSBs as no one has estimated the economists’ concept of net social gain taking into account the features of the market for SSBs outlined above.

Some of the empirical studies have estimated the reduction in aggregate consumption of SSBs following the introduction of a tax and/or the reduction in obesity as measured by the reduction in body weight and/or the savings in public health costs associated with reduced 21 obesity. The reduction in aggregate consumption of SSBs is fundamental to an understanding of the benefits of a tax from reducing public sector health costs and of the loss of consumer welfare.

Sharma et al. (2014), Etilé and Sharma (2014) and Duckett, Swerrisen and Wiltshire (2016) estimate the reduction in aggregate consumption of SSBs resulting from a single flat tax rate. The first two papers consider a 20 per cent ad valorem tax rate with the base being the value of consumer purchases (or the alternative 20 cents/litre specific duty). From the point of view of designing an optimal tax structure, the first two papers find that a specific duty results in a greater reduction in consumption, as noted above. Sharma et al. (2014) estimate the effects of the 20 per cent ad valorem tax on the consumption of these regular soft drinks, cordial and fruit drinks – the three categories of SSBs in their total of ten drink categories – for low income, middle income and high-income groups separately. For the low- income groups, for example, the reductions in consumption for each of these drink categories are 15, 46 and 3 per cent respectively. The reduction for the other two income groups follow a similar pattern. The corresponding reductions in body weight for these three income groups for one year are 0.4, 0.4 and 0.2 kg at the sample means. Similarly, Veerman et al. (2016) find that a 20 per cent ad valorem tax would reduce average consumption of adult Australian males by 12.6 per cent which, in turn would reduce the prevalence of obesity for men by about 2.7 per cent. The corresponding reduction in the prevalence of obesity for women is 1.2 per cent. These seem rather insignificant changes given the prevalence of the condition.

Duckett, Swerrisen and Wiltshire (2016) is the only empirical study to consider specific duties based on the sugar content of the drinks. First, they take a flat 30 or 40 cents/100 grams tax rate and then they calculate the effect of a UK two-part style tax, these two flat rates being equivalent to 20 cents/litre for drinks with a sugar content of less than 8 grams/100 mL and 40 cents/litre for drinks with a sugar content of more than 8 grams/100 mL. For these tax rates, they find that the reductions in consumption measured in terms of litres per person per year are 7 for a sugar content tax of 30 cents/litre, 10 for a sugar content tax of 40 cents/l and 9 for a tiered volumetric tax (Duckett, Swerrisen and Wiltshire (2016, Table C1). Their preferred rate of 40 cents/litre would produce, according to their estimates, a reduction in the Australian aggregate consumption of SSBs of 15 per cent. This would lead to only a slight reduction in the prevalence of obesity by about 2 per cent. 22

While these empirical studies differ in terms of the variables they use to measure the gains from a tax, they do show consistently that the gains from a 20 per cent ad valorem tax or other taxes of a similar level lead to only a modest reduction in consumption and to very small reductions in obesity.14 We note again, however, that all of these models ignore consumer and producer substitution responses to the changes in relative prices. We note too that all of the models cited do not take into account the external costs of medical complaints and diseases other than obesity, such as Type 2 diabetes and tooth decay. Other medical problems may be more responsive to reduced sugar consumption than obesity which is as an especially difficult complaint to reverse. These omissions understate the improvements in health and the gain in net benefits from the tax. Nevertheless, one can conclude that the estimates of the effects of introducing taxes of this magnitude on obesity alone are quite small, indeed a small fraction of the reductions in aggregate consumption.

One possible response is to consider higher rates of tax. We note that the rates of tax considered to date in the Australian empirical studies are all very low compared to the rates of excise duty currently applied in Australia to alcoholic beverage and to tobacco and tobacco products, the so-called sin taxes. For this comparison, all the rates need to be converted to ad valorem equivalent rates. Because the structure of excise taxes applied to both the alcoholic beverage and the tobacco and tobacco products groups is complex, with wide variations among the individual products within these groups, we have taken three of the most important products as a sample; these are spirits, beer, and cigarettes. The ad valorem percentage rates are 211, 117 and 145 respectively.15 These rates on all three products are at least five times the rates suggested for SSBs in the empirical studies we have considered.

5.6 Equity Considerations of the Tax Three of the Australian empirical studies have expressed concern over the regressivity of a tax on SSBs, i.e. the equity dimension of the tax: these are Sharma et al. (2014), Duckett, Swerrisen and Wiltshire (2016) and Lal et al. (2017). All three find that the SSB taxes they examine would fall disproportionately on lower income or disadvantaged socio-economic groups, though Sharma et al. (2014, p. 1182) find the tax to be “mildly regressive”. Moreover, all three note that poorer/disadvantaged groups have a higher incidence of diet related diseases and would therefore benefit more from a reduction in their consumption of SSBs. (Veerman et al. (2016, p.8) also make this point.) Sharma et al. (2014) qualify this view by noting that the effect of a tax on a group will depend on the group-specific own-price elasticity and it may be that poorer income groups have a lower price elasticity. They split 23 their sample of households into the three income groups of low-income, middle-income and high-income households. However, they find that richer households are generally less price elastic, though there is some variation in this pattern among the responses to the price changes of the individual drinks.

Furthermore, expenditure on SSBs is a very small part of household budgets. Duckett, Swerrisen and Wiltshire (2016, pp. 36-7), using ABS data, find that it is substantially less than 1 per cent of household disposable income for all households, including the heaviest consumers. Etilé and Sharma (2015, p. 7) find that, for their sample, expenditure on non-alcoholic beverages is slightly less than 1 per cent of annual household income. Sharma et al. (2014, p. 1182) find that “…the overall monetary amounts are negligible”. Lal et al. (2017) note that the equity of a tax on SSBs could be improved if the tax revenue were used to fund health initiatives benefitting those with greater disadvantage.

The revenue from a new tax on SSBs could also be used to reduce the level of other distortionary taxes in the economy, such as taxes on income and indirect taxes. This is a so- called second “dividend’ from a corrective Pigovian tax. (See Goulder (1995) for a discussion of the “double dividend” literature.) Pincus (2018, p. 46 and n. 19) notes that the gain from this fiscal dividend is uncertain. An alternative to reducing other taxes is to use the tax revenue from SSBs for a specific and positive purpose, for example, to fund sports facilities for schools. This is the approach that has been taken by the UK Government.

6. Conclusion – Should we Tax SSBs, and if so, How? The empirical studies and other research on SSBs in Australia have produced a great deal of information useful to the design of a possible tax on sugary products in Australia.

The literature indicates that there are three reasons why the consumption of SSBs and other sugary products leads to a where consumer choices do not properly reflect their long-term interest. These are that consumers do not have full information regarding the sugar content of the products they consume and the health risks associated with excess consumption of sugar, they do not have the will or foresight to take into account the long-term consequences of current consumption of sugars, and they may have become addicted to the sugar intake. Consequently, some consume the products in excess quantities. The costs of this excess consumption are borne by others in our economy as well as by consumers themselves. The standard economic prescription in this situation is a tax to correct for the overconsumption of sugary products. 24

With respect to the choice of products that might be subject to a tax, we, like most other studies, have chosen sugary drinks. This product group is well-defined, it accounts for more than one half of the aggregate consumption of free sugars in Australia and it could be taxed with low compliance costs via the existing excise tax system.

Logically, the design of an optimal tax on SSBs should begin with the objective of the tax, the features related to the type of tax and the base of the tax, and then proceed to try to determine the optimal level of the tax with the chosen type and base. Our review has shown that the best choice of the type of tax and the base of the tax is a multi-tier specific tax based on the sugar content of sugary drinks. This choice of the form of the tax is the same as that recently implemented in the UK and Ireland. The British government got in right in terms of the choice of the form.

With respect to the optimal level of a tax on the sugar content of SSBs, we do not have the information needed to make this choice. The case for a tax is still not proven in the manner that a full economic investigation requires, as Pincus asserted.

One feature of the effects which have been investigated is of particular concern. This is the effect that a tax of the order of 20 per cent ad valorem has on the aggregate consumption of these products ‒ it is less than 20 per cent and the induced fall in obesity from lower consumption is very small, around 2 per cent. We identified several reasons why these estimates may be too low. And we note that the effects of a tax on Type 2 diabetes and tooth decay and other medical complaints may be greater than those on obesity as obesity is a particularly difficult condition to reverse.

The obesity effect and other effects may be underestimated for another reason. For products which are addictive, current consumption levels depend on the pattern of consumption in past periods. Consequently, a reduction in current consumption caused by a tax has a further and beneficial lagged effect on consumption in future periods.

We conclude, as many other commentators do, that a sugar tax is only one possible component of a public policy or strategy to reduce total sugar consumption. There are complementary policies which would help to reduce the externality and internality costs.

The first priority should be information which would lead to more healthy drink and foods choices by individual consumers and parents. Several reviews of food labelling are currently underway. For SSBs, we need a system of front-of-pack labelling for all SSB 25 varieties which is clearly visible and understandable by consumers. There should also be more campaigns to educate parents and children of the cumulative and perhaps irreversible health risks stemming from excessive sugar consumption.

Given the magnitude of the problems resulting from excess sugar consumption and the need to signal to consumers who consume SSBs in excess that their actions endanger their own health and impose substantial costs on others, we conclude that a tax on SSBs is an essential component of an overall strategy to reduce the costs of excess consumption of sugar. A tax acts as a signalling device, increasing consumers' awareness and alerting them to the dangers of overconsumption which they might otherwise ignore. It increases the effect of complementary policies such as health education.

The best form of the tax is to follow the approach taken in the UK and Ireland. The UK rates of 18p per litre for a sugar content of more than 5 grams per 100 mL and 24p per litre for a sugar content of more than 8 grams per 100 mL translate into ad valorem equivalents of 20 per cent and 40 per cent respectively of the wholesale pre-tax price. The Australian specific tax equivalent of the UK rates are 33 cents and 43 cents, respectively, at the current exchange rate. These are very moderate rates compared with the current excise tax rates on alcoholic beverages and on tobacco and tobacco products. These rates could be adjusted later if desirable.

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Figure 1. The Response of Manufacturers of SSBs in the United Kingdom

Note: The light bars give the sugar content of these drinks prior to the manufacturers' response to the tax. The dark bars give the tax-adjusted sugar content. For some drinks, for example Red Bull, the absence of a light bar indicates that there has been no reduction in sugar content. Source: United Kingdom Behavioural Insights Team (2018)

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Table 1. Empirical Studies in Australia of a Tax on SSBs

Authors Notable Model Data source Objective Tax(es) modelled Effects estimated Features function Sharma et al. (2014) – a separable group of AC Nielsen Home None stated (i) 20 cents/litre average per capita 10 non-alcoholic Scan Consumer Panel (ii) 20 % ad valorem tax weight loss drinks database for Victoria (i) 0.41 kg – IDEAL demand 2010 (ii) 0.29 kg system – 3 income groups +tax burden (low, middle, high) Etilé and Sharma – a separable group of AC Nielsen Home None stated (i) 20 cents/litre reduction in average (2015) 8 non-alcoholic Scan Consumer Panel (ii) 20% ad valorem tax SSB cons. per drinks database 2010 capita – Tobit models (i) 0.61 l/month – 2 groups of (ii) 0.60 l/month consumers (moderate and + tax burden high) Veerman et al. (2016) – aggregate SSBs Australian Health ABS None stated 20% ad valorem tax reduction in average – lifetime model of Health Survey 2011-12 SSB cons. per adults alive in 2010 of the Consumption of capita – men/women and age Added Sugars (i) adult male 17g/day groups (ii) adult female 9g/dy

+ health care costs + tax revenue

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Authors Notable Model Data source Objective Tax(es) modelled Effects estimated Features function Duckett, Swerissen – aggregate SSBs IBIS World and Retail None stated but (i) 30 cents per litre reduction in average and Wiltshire (2016) – simple one-good World databases tax described as (ii) 40 cents per litre SSB cons. per partial equilibrium a Pigovian (iii) 20 % ad valorem capita model externality- tax (i) 8 l/year correcting tax (iv) sugar content 30 (ii) 10 l/year cents/100 grams (iii) 10 l/year (v) sugar content 40 (iv) 7 l/year cents/100 grams (v) 10 l/year (vi) sugar content: (vi) 9 l/year tiered + savings in public sector health costs –+tax revenue Cobiac et al. (2017) – aggregate SSBs ABS Health Survey of DALYS 20 % ad valorem tax savings in DALYS – lifetime model Nutrition and Physical Cost- 270,000 Activity 2011-12 effectiveness +savings in lifetime health costs Lal et al. (2017) – aggregate SSBs ABS Health Survey Cost- 20 % ad valorem tax reduction in average – lifetime model of 2011-12 of the effectiveness SSB cons. per Australian Consumption of capita population Added Sugars - soft drinks 11.52% – men/women and age - cordial 33.23% groups - fruit drinks 25.50% +measures of health (BMI and DALYS) + savings in health care costs + tax revenue +deadweight loss of consumer welfare

Table 2. The Sugar Content of Popular SSBs in Australia

Serving Sugar per Sugar per Sugar per Sugar per Drink size serve (g) serve (tsp) 100mL (g) 100mL (tsp) Soft drinks Solo 600mL 69 17.3 11.5 2.9 Coca Cola 600mL 64 16.0 10.6 2.7 Sprite 600mL 52 13.0 8.6 2.2 Fanta 375mL 41 10.3 10.9 2.7 Bundaberg: Ginger 375mL 40.5 10.1 10.8 2.7 Beer Coca Cola 375mL 40 10.0 10.6 2.7 Energy drinks Rockstar: Super 500mL 67 16.8 13 3.3 Sours Energy Drink V Energy Drink 500mL 53 13.3 10.6 2.7 Mother 500mL 51 12.8 10.1 2.5 Red Bull 250mL 27 6.8 11 2.8 Sports drinks Gatorade: Fierce 600mL 36 9.0 5.5 1.4 Grape flavour Gatorade: Tropical 600mL 36 9.0 6 1.5 Powerade: Mountain 600mL 35 8.8 5.8 1.5 Blast flavour Powerade: Lemon 600mL 35 8.8 5.8 1.5 lime

Source: Rethink Sugary Drink (2018)

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Table 3. Marshallian Own Price and Cross Price Elasticity of Demand for Drinks

(1) (2) (3) (4) (5) (6) (1) Regular soft drinks (SSB) -0.63*** 0.28*** 0.03** 0.03*** 0.60*** 1.31*** (2) Diet soft drinks 0.16*** -1.01*** 0.10 0.17 0.13 0.61*** (3) Cordial (SSB) -0.51*** 0.09 -0.98*** -0.17** 0.40*** -1.14*** (4) Fruit drink (SSB) -0.62 0.36 -0.21** -1.05*** -0.53*** -0.29 (5) Fruit juice 0.18 -0.10 0.11*** -0.07* -1.20*** 0.05 (6) High-fat milk 0.46 0.10 -0.16 -0.01 0.01 -1.84***

Notes: 1. regular soft drinks (i.e. non-diet soft drinks) include standard soft drinks, mixers, sports drinks, energy drinks, still drinks and flavoured bottled water

diet soft drink includes diet/no-sugar/no-joule versions of regular soft drinks

cordials include mainstream, syrup, premium and powder sugar added cordials

fruit drinks

fruit juices include reconstituted, fresh and concentrated fruit juices

high-fat milk includes flavoured and plain types of full fat standard milk, soy milk and rice milk

2. Sharma et al. (2014) also report the own- and cross-price elasticities for bottled water, low-fat milk, tea and coffee. These are omitted because the cross-price elasticities of these products with the SSB products are low.

Source: Sharma et al. (2014), Table III.

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Etilé, F. and Sharma, A. 2015, ‘Do high consumers of sugar-sweetened beverages respond differently to price changes? A finite mixture IV-Tobit approach’ Health Economics vol. 24(9), pp. 1147-1163. Fleischer, V. 2015, ‘Curb your enthusiasm for Pigovian taxes’, Vanderbilt Law Review, vol. 68, pp. 1673-1713. Freebairn, J. 2010, ‘Taxation and obesity?’, Australian Economic Review, vol. 43 (1), pp. 54- 62. Fullerton, D. and Metcalf, G. E. 2002, ‘Tax incidence’, Chapter 26 in Auerbach, A. and Feldstein, M. (eds) Handbook of Public Economics, vol. 4, Elsevier, Amsterdam. Gardiner, A. 2016, ‘Implications of a sugar tax in New Zealand: Incidence and effectiveness’, New Zealand Treasury Working Paper 16/09, New Zealand Treasury, Wellington. Goulder, L. 1995, ‘Environmental taxes and the double dividend: A reader’s guide’, Internationa-183. Griffith, R., O’Connell, M. and Smith, K. 2017, ‘Proposed minimum unit price for alcohol would lead to large price rises’, Institute for Fiscal Studies Briefing Note No. 222. Griffith, R., O’Connell, M. and Smith, K. 2018, ‘Corrective taxation and internalities of food consumption’, CESifo Economic Studies, 1-14. Jou, J. and Techakehakij, W. 2012, ‘International application of sugar-sweetened beverage (SSB) taxation in obesity reduction: Factors that may influence policy effectiveness in country-specific contexts’, Health Policy,107, pp. 83-90. Just, D. R. and Gabrielyan, G. 2016, ‘Food and consumer behavior: Why the details matter’, Agricultural Economics, vol. 47 Supplement 73-83. Lal, A., Mantillaa-Herrera, A. M., Veerman, L., Backholer, K. , Sacks, G. , Moodie, M., Siahpush, M., Carter, R. and Peeters. A. 2017, ‘Modelled health benefits of a sugar- sweetened beverage tax across different socioeconomic groups in Australia: A cost- effectiveness and equity analysis’, PLos medicine, vol. 14 (6), pp. 1-17. Levy, G. S. and Shrapnel, W. S. 2014, ‘Quenching Australia’s thirst: A trend analysis of water-based beverage sales from 1997 to 2011’, Nutrition and Dietetics, vol. 71, pp. 193-200. Markey-Towler, B. (2018), ‘Obesity is a market failure and innovation, not sin taxes, may be the solution’, The Conversation, August 13. Marron, D. B. 2015, ‘Should we tax internalities like externalities’, Center Working Paper, Urban Institute and Brookings Institution, Washington, DC, November. Pincus, J. 2018, ‘Grattan Institute’s case for sugar tax is not proven’, Australian Economic Review, vol. 51(1), pp. 41-51. Pogue, T. F. and Sgontz, L. G. 1989, ‘Taxing to control social costs’, American Economic Review, vol. 79 (1), pp. 235-243. 33

Reichelt, A. 2018, ‘Fact or fiction – Is Sugar addictive?’, The Conversation, 22 February. Rethink Sugary Drink 2018, http://www.rethinksugarydrink.org.au/how-much-sugar . Sacks, G., Veerman, J. L., Moodie, M., and Swinburn, B. 2011, ‘ “Traffic-light” nutrition labelling and “junk food” tax: A modelled comparison of cost-effectiveness for obesity prevention’, International Journal of Obesity, vol. 35, pp. 1001-1009. Sharma, A., Hauck, K., Hollingsworth, B. and Siciliani, L. 2014, ‘The effects of taxing sugar-sweetened beverages across different income groups, Health Economics, vol. 23, pp. 1159-1184. Tan, S-Y. 2018, ‘White, brown, raw, honey: Which type of sugar is best?’, The Conversation, 8/3/2018. The Economist 2018, ‘Taxing soft drinks’, April. United Kingdom Behavioural Insights Team 2016, 'The soft drinks levy is working even before it has been applied', http://us11.campaignarchive1.com/?u=8cdb18d899017fd1ee9804a22&id=5aa9d5675c . United Kingdom Behavioural Insights Team 2018, 'Why lower revenue from the sugar tax is probably a good thing', https://us11.campaign- archive.com/?u=8cdb18d899017fd1ee9804a22&id=ad5122469f Veerman, L. (2018), ‘Obesity is a market failure and personal responsibility will not solve it alone’, The Conversation, 13 August. Veerman, J. L., G. Sacks, N. Antonopolous and J. Martin 2016, ‘The impact on sugar- sweetened beverages on health and health care costs: A modelling study’, Plos One vol. 11 (4), pp. 1-10. World Health Organisation 2015, Guidelines: Sugar Intake for Adults and Children, World Health Organisation, Geneva. Yang, O., Sivey, P., de Silva, A. M. 2016, ‘Preschool children’s demand for sugar sweetened beverages: Evidence for stated-preference panel data’, Melbourne Institute Working Paper No. 25/16, Melbourne Institute, Melbourne. Zhang, E. 2018, 'Diet soda may be hurting your diet', The Conversation, 17 May.

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ENDNOTES

1 The Cancer Council and Diabetes are members of Rethink Sugary Drinks which is a coalition of 15 health and community organisations.

2 There is an earlier study by Sacks et al. (2011) of a tax on “junk foods” collectively which includes soft drinks.

3 Yang et al. (2016) examine the consumption of SSBs by pre-school children and calculate price elasticities for this group but they do not consider any particular tax.

4 Some health economists have raised similar objections, although they do not use the framework of Pigovian taxes. For example, Devish (2013a and b) questions the appropriateness of food taxes; he mentions the uncertainty regarding their effects on consumption and health, the disproportionate effect on households with low incomes and the existence of non-taxed substitutes with adverse health effects.

5 For a discussion, see Fullerton and Metcalf (2002, pp. 1823–1832) and references therein.

6 In 2014 the Health Star Rating System was introduced by the Australian Government after consultation with health groups and the food industry. It is a rating derived from 7 or 8 components, sugar being only one. It is voluntary and it has not been applied to many drinks. Even if it were applied to all drinks, it would be of no use to consumers wishing to obtain information about the sugar content of a drink unless it also displayed the sugar nutrient content.

7 The model with heterogeneous consumers can be used to analyse other sin taxes. Pogue and Sgontz (1989) presented an analysis of alcohol taxes which distinguishes between the two groups of “abusers” and “non-abusers”. Fleischer (2015) analyses the consequences of heterogeneity among both producers and consumers as generators of externalities.

8 Accompanying his statement that the SSB tax proposal of Duckett, Swerrisen and Wiltshire (2016) was “bonkers mad”, Barnaby Joyce, who was still leader of the National Party at the time, offered alternative advice: “If you want to deal with being overweight, here’s a suggestion: stop eating so much and do a bit of exercise.” Our review indicates that heavy consumers of SSBs are not able to choose the level of consumption that is in their best own long-term interests.

9 They also confused real and transfer costs. Clarke (2008) claims that ignoring the non- medical costs of interventions intended to improve health outcomes is a common failing of health experts. He calls this the “medical approach” in contrast to the “economists’ approach”.

10 The public health costs which have been measured in empirical studies are the average health costs at current levels of consumption. For all drinkers as a whole, the marginal social cost may be a convex function of the aggregate consumption of SSBs. If the marginal social cost function is convex, the marginal social cost is greater than the average social cost at the optimum point. Offsetting this, the marginal social cost at the optimum is less than the

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marginal social cost measured at the actual level of consumption. Consequently, the marginal social cost at the optimum may be less than or greater than the average social cost at the actual level of consumption.

11 Levy and Shrapnel (2014, p. 198), also using the AC Nielsen database, calculate that on an annual basis SSBs are consumed by 84.1 per cent of the population. This means that 16 per cent do not consume SSBs. To this must be added the persons who consume SSBs at a low or moderate level that does not pose a health risk. We do not know this number.

12 In studies done in other countries, there is some evidence that heavy consumers have low elasticity of demand, see Gardiner (2016, pp. 8,10).

13 It is also possible that consumers will substitute non-drink products, such as sugared junk foods or food high in fat, for SSBs. Sharma et al. (2014, p. 1181) note that the evidence for this is inconclusive. This possibility is not consistent with the assumption of separability in the utility function.

14 Because Mexico was the first country to introduce a 'soda' tax, there has been considerable interest in its effects on consumption. Andalón and Gibson (2018) write that the estimated first-year reduction in consumption was in the range 4–7 per cent and that the corresponding reduction in weight would be 0.2 to 0.3 kg.

15 For spirits and beer, the rates are those given in Anderson (2014). The ad valorem consumer tax equivalent (CTE) is calculated as the specific excise as a percentage of the pre- tax wholesale price. For cigarettes the pre-tax wholesale price for 2018 was calculated as the wholesale price of $30.02 per pack of 25 (http://wholesale.pattersonroad.com.au/rrp_cigarettes.jsp ) less the excise of $0.71046/stick (Australian Tax Office, ).

Minerva Access is the Institutional Repository of The University of Melbourne

Author/s: Lloyd, P; MacLaren, D

Title: Should We Tax Sugar and If So How?

Date: 2019-03

Citation: Lloyd, P. & MacLaren, D. (2019). Should We Tax Sugar and If So How?. Australian Economic Review, 52 (1), pp.19-40. https://doi.org/10.1111/1467-8462.12299.

Persistent Link: http://hdl.handle.net/11343/233645

File Description: Accepted version