An Economic Analysis Of Sugar Sweetened Beverage Taxes - A Model With Substitutes And Complements

Studies have shown that excess sugar intake is one of the potential causes of obesity and diabetes. As a result, taxing sugar sweetened beverages (SSBs) has been put forward as a possible solution. However, SSB taxes may not be effective, as consumers may switch to other untaxed drinks. In addition, there are gaps regarding (1) the socially optimal tax rate in New Zealand, (2) which tax base is the most favorable at its socially optimal level, and (3) whether taxing all beverages is superior to taxing only SSBs. Given these, this study addresses the socially optimal tax rate, taking into account substitutes and complements. It also explores the most efficient tax base, and whether beverage taxes are superior to SSB taxes.

The study starts from constructing a utility-maximization model of the optimal corrective tax, which allows substitution and complementary effects. Since the marginal harm from SSBs is included as a component of the optimal tax formula, a contingent valuation survey is conducted to estimate people’s willingness-to-pays for health risk reductions, the results of which are further used to measure the monetary value of harm associated with internalities. Moreover, cost analyses using a Markov model and the UK Prospective Diabetes Study model are applied to estimate the harm associated with externalities. Finally, effects of taxes on social welfare are modeled, the result of which can inform the question of which tax base is the most efficient, and whether beverage taxes are superior to SSB taxes or not.

Our estimate of the optimal tax rate suggests that the prices of SSBs in New Zealand should probably increase by 100% to 200%. A beverage tax by calories is the most favorable option, as it has a perfect relationship with the harmful ingredients. Whether taxing all beverages by price or by litres is superior to taxing only SSBs depends on the calories substitutes contain, and the magnitude of substitution effects. When there are strong substitution effects, and substitutes contain low energy, taxing only SSBs is better than taxing all beverages by price or by litres.