Master´S Thesis
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THE FINNISH EXCISE TAX ON SUGAR- SWEETENED BEVERAGES AND ITS EFFECT ON THEIR PRICES AND DEMAND Jyväskylä University School of Business and Economics Master´s Thesis 2018 Author: Miika Heinonen Subject: Economics Supervisor: Professor Ari Hyytinen ABSTRACT Author Miika Heinonen Title The Finnish Excise Tax on Sugar-Sweetened Beverages and Its Effect on Their Prices and Demand Subject Type of Work Economics Master´s Thesis Time (date.) Number of Pages 13th April 2018 81 Abstract The consumption of sugar-sweetened beverages (SSBs) is associated with overweight, obesity and related illnesses, such as type 2 diabetes. Excise tax on SSBs is seen as an effective tool to reduce their consumption and improve pop- ulation health. Because there are possible market failures associated with the consumption of SSBs, taxing them might be preferable to other taxes. In January 2014, Finland doubled its excise tax rate for SSBs from 0.11 euros to 0.22 euros per litre. Considering the 14 percent ad valorem tax, this translates into a price increase of 0.125 euros. To understand the possible beneficial health effects of the tax, it is essential to estimate, first, its effect on prices (pass- through) and, second, how responsive is consumption to changes in prices (price elasticity of demand). Data, provided by HOK-Elanto, from S-Market stores is used to analyse these two effects. Data consists of daily price and sales records of beverage items from four separate stores for the period 2013-2014. The pass-through of the tax is estimated by applying the differences-in- differences method. It is estimated that the prices of taxed beverages rose somewhere between 0.17 and 0.19 euros per litre, indicating overshifting of the tax by approximately 36-52 percent. Then, the tax change is used as an instru- ment for prices to estimate the price elasticity of SSBs, which is estimated to be -0.78 for all SSBs and -0.82 for regular sodas. Obtained pass-through and price elasticity estimates would indicate that the consumption of all SSBs fell by ap- proximately 6.5-7.3 percent and that the consumption of regular sodas fell by approximately 7.5-8.5 percent. The yearly consumption of SSBs was already at a comparatively low level (53.9 litres of regular sodas per capita) prior to the tax change. The tax is calculated to have reduced the yearly consumption by 4.0-4.6 litres. Key Words soft drinks, sugar-sweetened beverages, excise tax, pass-through, price elastici- ty of demand, corrective taxation, public health, overweight and obesity Location Jyväskylä University Library TIIVISTELMÄ Tekijä Miika Heinonen Työn nimi Sokerilla makeutettujen virvoitusjuomien valmisteveron vaikutukset juomien hintoihin ja kysyntään Suomessa Oppiaine Työn laji Taloustiede Pro gradu -tutkielma Aika (pvm.) Sivumäärä 13. huhtikuuta 2018 81 Tiivistelmä Sokerilla makeutettujen juomien kulutus on yhteydessä ylipainoon, liikaliha- vuuteen ja niihin liittyviin sairauksiin, kuten tyypin 2 diabetekseen. Sokerillis- ten juomien valmisteveroa pidetään tehokkaana keinona vähentää kulutusta ja parantaa väestön terveyttä. Koska virvoitusjuomien kulutukseen liittyy poten- tiaalisia markkinahäiriöitä, niiden verotuksella on mahdollista parantaa yhteis- kunnallista kokonaishyvinvointia. Tammikuussa 2014 Suomi kaksinkertaisti virvoitusjuomien valmisteveron so- kerillisten juomien osalta 0,11 eurosta 0,22 euroon litralta. Kun otetaan huomi- oon verosta maksettava 14 prosentin suuruinen arvonlisävero, tämä merkitsee noin 0,125 euron hinnankorotusta sokerillisten juomien osalta. On tärkeää ymmärtää, mikä on veron vaikutus hintoihin (läpikulku), ja toisaalta miten ky- syntä reagoi hintojen muutokseen (kysynnän hintajousto). HOK-Elannolta saa- tua aineistoa juomien päivittäisistä myynneistä ja hinnoista käytetään näiden hinta- ja kysyntävaikutusten analysoimiseksi. Aineisto on peräisin neljästä hel- sinkiläisestä S-Market myymälästä ja kattaa vuodet 2013-2014. Veron läpikulkua hintoihin arvioidaan differences-in-differences regressio- menetelmällä, käyttäen eri kontrolliryhmiä. Estimointitulosten mukaan sokeril- listen juomien hinnat nousivat suunnilleen 0,17-0,19 euroa litralta, mikä viittaa siihen, että hinnat ylireagoivat veromuutokseen noin 36-52 prosenttia. Tämän jälkeen veromuutosta käytettiin instrumenttimuuttujana hinnalle, sokerillisten juomien hintajouston estimoimiseksi (-0,78 kaikki sokerilliset juomat ja -0,82 sokerilliset virvoitusjuomat). Tulosten mukaan sokerillisten virvoitusjuomien kulutus laski noin 7,5-8,5 prosenttia. Kulutus oli jo suhteellisen alhaisella tasol- la (53,9 litraa henkilöä kohden) ennen veromuutosta. Siten veromuutoksen ar- vioidaan laskeneen vuosittaista kulutusta noin 4,0-4,6 litralla. Asiasanat virvoitusjuomat, sokerilla makeutetut juomat, valmistevero, veron hintavaiku- tus, kysynnän hintajousto, haittavero, kansanterveys, ylipaino ja lihavuus Säilytyspaikka Jyväskylän yliopiston kirjasto CONTENTS 1 INTRODUCTION ................................................................................................ 7 1.1 Soft Drink Consumption and Health ....................................................... 7 1.2 Taxing Sugar-Sweetened Beverages ........................................................ 9 2 THEORETICAL BACKROUND ...................................................................... 11 2.1 Corrective Taxes ........................................................................................ 11 2.1.1 Sin Taxes and the Self-Control Problem ...................................... 13 2.1.2 Soft Drinks and Market Failure ..................................................... 16 2.1.3 The Finnish Soft Drink Tax ............................................................ 18 2.2 Tax Pass-Through and Incidence ........................................................... 20 2.2.1 Perfect Competition ........................................................................ 21 2.2.2 Monopoly ......................................................................................... 23 2.2.3 Symmetric Oligopoly ...................................................................... 26 2.2.4 General Model ................................................................................. 28 2.2.5 Multiproduct Retailers ................................................................... 30 2.2.6 Summary .......................................................................................... 34 3 PREVIOUS LITERATURE ................................................................................ 35 3.1 Empirical Studies on the Pass-Through ................................................ 35 3.1.1 Evidence from Denmark ................................................................ 35 3.1.2 Evidence from France ..................................................................... 36 3.1.3 Evidence from Mexico .................................................................... 37 3.1.4 Evidence from Berkeley, California .............................................. 39 3.2 Demand Estimation .................................................................................. 43 3.2.1 Price Elasticity of Soft Drinks - Two Systematic Reviews ......... 45 3.2.2 Evidence from Finland ................................................................... 46 3.2.3 Evidence from Chile and Mexico .................................................. 48 3.2.4 The Case of Untaxed, Unhealthy Substitutes .............................. 50 4 DATA AND METHODS ................................................................................... 53 4.1 S-Market Data ............................................................................................ 53 4.1.1 Descriptive Statistics ....................................................................... 54 4.2 Differences-in-Differences Regression ................................................... 57 4.3 Instrumental Variables Regression ........................................................ 59 5 RESULTS ............................................................................................................. 62 5.1 Pass-Through Estimates ........................................................................... 62 5.2 Price Elasticity Estimates ......................................................................... 67 5.3 From Euros to Litres and Kilograms ...................................................... 69 6 CONCLUSIONS ................................................................................................. 72 BIBLIOGRAPHY .......................................................................................................... 74 APPENDIX ................................................................................................................... 79 FIGURES FIGURE 1 Soft drink consumption per capita in Finland, EU and Belgium. (UNESDA 2017.) .................................................................................................. 8 FIGURE 2 Evolution of soda prices (S-Market vs. Statistics Finland data) ......... 56 FIGURE 3 Evolution of beverage prices (in S-Market data) ................................. 59 FIGURE A1 Evolution of monthly beverage sales (2013-2014) ............................. 79 FIGURE A2 Evolution of monthly soda sales (2013-2014) ................................... 80 TABLES TABLE 1 Similar excise taxes for soft drinks from around the world ................ 19 TABLE 2 Summary of previous studies on soft drink tax pass-through ........... 43 TABLE 3 Soft drink price elasticity estimates