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Taxing free sugar: the devil is in the resulting distribution of gains and pains

In the current issue, Liu et al. (2022) show that setting the threshold for excessive consumption of free sugar at 5% of total energy intake, excessive consumption of free sugar “costs” $5 billion to society: $2.2 billion in costs of treatment and $2.8 billion in so-called “indirect” costs (a monetary equivalent of years of life lost and years of perfect health lost due to disability). The policy recommendation based on this estimate of societal cost is to tax products that contain free sugar, beyond sugar-sweetened beverages. A more thorough economic reasoning helps nuance such a recommendation. Taxation is seen as an effective tool to reduce consumption of a product, and the reasoning underlying such a recommendation is that society’s gain would justify individuals’ pain of paying a tax and/or reducing the consumption of a good they seem to enjoy (since they are willing to pay for it). Of course, society is comprised of individuals, and there could be a way to justify that society’s gain actually translates into a series of individual gains; if these individual gains more than offset the individual pains, taxationmight make perfect sense. However, the devil is in the distribution of gains and pains. To give an example: individuals who already consume less than the recommended threshold of free sugar will pay a tax on products containing free sugar but will not gain in longevity or quality of life. Their only benefit would be through a reduction in the cost of healthcare, therefore of their income tax. To better understand the distributional consequences of taxing free sugar (or any product detrimental to health), we need to understand the economic rationale underlying taxation. Taxes can be justified as a way to raise a government’s revenue. When such is the goal, the best tax is the tax that does not distort individual behaviours, especially their consumption choices. The idea is that the government needs resources but will try to get them without perturbing the functioning of markets, because, in theory in liberal economies, markets deliver the optimal distribution of goods and, possibly, well-being. In this view, taxes on addictive goods (such as tobacco or alcohol or fuel) are to be preferred because consumers will not consume less when the good is taxed. But taxes can also be justified as a way to correct markets because markets do not work properly and, as a result, do not deliver optimal distributions of well-being. Before jumping to the conclusion that economists lack logical consistency, let us simply say that economists are aware that markets for some goods work well and markets for other goods don’t. The main reason a market fails is when the market price of a good does not reflect the full production cost of that good. This is called an “externality”: there is something external to the market price that should be internalized into the transaction. In our current example, the true cost of consuming free sugar should include health care costs associated with the diseases (mostly, diabetes) that result from that consumption. Excessive consumers of free sugar don’t pay for that cost (at least, in Canada, where health care is publicly financed) and are subsidized by non-excessive consumers. The tax would simply add to the current market price of free sugar an amount reflecting health care costs associated with excessive consumption of free sugar. It is important to note here that this externality exists only because health care is publicly financed: in a world where private insurance covers health care costs, excessive consumers of free sugar pay the full cost of their behaviour through higher insurance premiums once they become diabetic. The main rationale for such a tax is fairness: * Michel Grignon grignon@mcmaster.ca