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  • How well targeted are soda taxes?

    Pierre Dubois, Rachel Griffith and Martin OConnell

    Nemmers Prize Conference, May 2017

    Introduction A tax on soda Demand Estimates Analysis Summary 1 / 38

  • Corrective Taxes

    I Corrective taxes have long been seen as a tool to improve socialwelfare when consumption imposes costs on others

    I externalities (Pigou, 1920)

    I taxes on fuel, alcohol, tobacco, gambling are examples

    I More recently have been advocated to reduce consumption thatimposes costs on your future self

    I internalities

    I Gruber and Koszegi, 2004; ODonoghue and Rabin, 2006; Haavio andKotakorpi, 2011; Allcott, Mullainathan and Taubinsky, 2014, ...

    I Soda taxes are a leading example

    Introduction A tax on soda Demand Estimates Analysis Summary 2 / 38

  • Excess consumption of sugar

    I Considerable evidence of very high consumption of sugar

    I in US over 65% of population and in UK over 70% consume more thanrecommended max of 10% total calories from added sugar

    I even higher amongst children

    I Growing evidence that

    I leads to obesity, type 2 diabetes, heart disease, cancers, etc...

    I is associated with decreased bone density and other signs ofmalnutrition and poor mental health, particularly in children

    I may be a driver of poor performance and long term outcomes inchildren from low socio-economic status households

    Introduction A tax on soda Demand Estimates Analysis Summary 3 / 38

  • Mean consumption of added sugar per dayRecommended maximum is 37.5 grams for men and 25 grams for women

    Source: Euromonitor

    Introduction A tax on soda Demand Estimates Analysis Summary 4 / 38

  • Children have shifted from milk to soda, US

    Source: Nielsen and Popkin (2004), calories from drinks children ages 2-18

    Introduction A tax on soda Demand Estimates Analysis Summary 5 / 38

  • Children massively over consume sugar, UK

    Introduction A tax on soda Demand Estimates Analysis Summary 6 / 38

    Source: NDNS

    years old: 1.5-3 4-10 11-18 19-64 65+

  • Soda taxes

    I World Health Organisation (WHO) has urged countries to tax sugarydrinks to reduce sugar consumption, especially in children

    I Taxes on soda or sugar in soda have been introduced in

    I France in 2012, Mexico in 2013, UK in 2016

    I four cities in California (Albany, Berkeley, Oakland, and San Francisco)

    I Boulder, Philadelphia

    I Cook County website

    I On November 10, 2016, the Cook County Board of Commissionerspassed the Cook County Sweetened Beverage Tax Ordinance. The taximposed will be at the rate of $0.01 per ounce on the retail sale of allsweetened beverages in Cook County. The effective date of the tax isJuly 1, 2017.

    Introduction A tax on soda Demand Estimates Analysis Summary 7 / 38

  • Why target soda?

    I Soda represents a substantial share of sugar consumption

    I Soda consumption is higher for those consuming a lot of sugar

    I particularly children and young adults

    I Soda has no redeeming nutritional characteristics

    Introduction A tax on soda Demand Estimates Analysis Summary 8 / 38

  • Soda is a large % of calories from added sugar, US

    Introduction A tax on soda Demand Estimates Analysis Summary 9 / 38

    50%

    0%

    Share ofcalories fromadded sugarthat comefrom soda

    Share of calories from added sugarSource: NHANES

  • And more so for younger consumers, US

    Introduction A tax on soda Demand Estimates Analysis Summary 10 / 38

    50%

    0%

    Share ofcalories fromadded sugarthat comefrom soda

    AgeSource: NHANES

  • Soda is a large % of calories from added sugar, UK

    Introduction A tax on soda Demand Estimates Analysis Summary 11 / 38

    50%

    0%

    Share ofcalories fromadded sugarthat comefrom soda

    Share of calories from added sugarSource: NDNS

  • And more so for younger consumers, UK

    Introduction A tax on soda Demand Estimates Analysis Summary 12 / 38

    50%

    0%

    Share ofcalories fromadded sugarthat comefrom soda

    AgeSource: NDNS

  • Soda Taxes

    I Soda taxes largely aim to correct for internalities

    I people make errors, we might be able to design policies to help themmake better choices (e.g. ODonoghue and Rabin, 2003, 2006)

    I tax might serve as a commitment device that benefits those at risk ofmaking errors

    I but only if they respond to tax, if have inelastic demand they mightboth pay the tax and bear the internal costs in future

    I We empirically evaluate the efficiency and equity implications ofrecently introduced soda taxes

    I overall, high sugar consumers have inelastic demand for sugary soda,dont respond

    I however, younger consumers (including those with high sugarconsumption) are more price elastic and do respond

    Introduction A tax on soda Demand Estimates Analysis Summary 13 / 38

  • Our contribution

    I We estimate demand (discrete choice) for drinks on-the go

    I less well studied than the at home market

    I optimisation errors may be worse in this context (temptation)

    I accounts for around half of soda consumption

    I We exploit longitudinal data to estimate individual specific demands

    I these can be used to directly assess how well targeted a tax is byrelating individual consumers responsiveness to the tax to othercharacteristics that proxy for marginal harm

    I we can also study the distributional consequences of the tax

    I To help organise discussion of our empirical results and highlight thekey forces at play we first consider the effects of a soda tax using asimple welfare criterion

    Introduction A tax on soda Demand Estimates Analysis Summary 14 / 38

  • A tax on sugar in soda

    I consumers: i {1, ...,N}, with income yiI food and drink products: j = {1, ..., j , j + 1, ..., J}

    I sodas: j {1, ..., j } = w

    I other products that contain sugar: j {j + 1, ..., J} = nw

    I p = (p1, . . . , pJ): post tax prices

    I zj : sugar in each product

    I : tax rate on the sugar in soda

    I vi (p, yi ): indirect decision utility

    I demands are: qij(p, yi ) = vi/pjvi/yi

    Introduction A tax on soda Demand Estimates Analysis Summary 15 / 38

  • A tax on sugar in soda

    I Total sugar in a consumers diet

    Si (p, yi ) =j

    qij(p, yi )zj

    I includes sugar from soda (w) and non-soda (nw)

    Si (p, yi ) = Swi (p, yi ) + Snwi (p, yi )

    I vi (p, yi ) governs choice, but not necessarily long term welfare

    I sugar consumption may give rise to future costs, both to the consumer(internalities) and to others (externalities), that consumers do not takeaccount of at the point of consumption

    I i (Si (p, yi )): the internality (+ externality) from sugar consumption

    I consumers ignore this when making choices

    Introduction A tax on soda Demand Estimates Analysis Summary 16 / 38

  • A tax on sugar in soda

    I Policy maker chooses a tax on sugar in soda () to maximise autilitarian social welfare function,

    W =i

    [vi (p, yi + ri ) i (Si (p, yi + ri ))]

    I where [vi (.) i (.)] is consumers long run welfare

    I ri is any rebate to consumer i

    I pj denotes the pre-tax price

    I for soda products (j w ), pj = pj + zj

    I for non-soda products (j nw ) pj = pj

    Introduction A tax on soda Demand Estimates Analysis Summary 17 / 38

  • A tax on sugar in soda

    I Effect of a marginal change in the soda tax:

    dW

    d=

    i(i )|S

    wi |

    direct efficiency

    iiS

    nwi

    indirect efficiency

    i(i )Swi

    redistribution

    I i is the marginal internality (+externality) of consumer i

    I S i impact of marginal change in tax rate on consumers sugar demand

    I i is the marginal (decision) utility of income of consumer i

    I =

    i ii is weighted average marginal utilities

    Introduction A tax on soda Demand Estimates Analysis Summary 18 / 38

  • A tax on sugar in soda

    I Effect of a marginal change in the soda tax:

    dW

    d=

    i(i )|S

    wi |

    direct efficiency

    iiS

    nwi

    indirect efficiency

    i(i )Swi

    redistribution

    I Consumers with a marginal internality above the tax rate

    I this term is positive, reduction in sugar leads to a welfare gain

    I the size of the gain is proportional to how responsive the consumersdemand for sugar in soda is to the tax

    I higher correlation between i and |Swi | the more effective the tax

    I Consumers with marginal internality below tax rate

    I this term is negative

    Introduction A tax on soda Demand Estimates Analysis Summary 18 / 38

  • A tax on sugar in soda

    I Effect of a marginal change in the soda tax:

    dW

    d=

    i(i )|S

    wi |

    direct efficiency

    iiS

    nwi

    indirect efficiency

    i(i )Swi

    redistribution

    I if taxing the sugar in soda increases demand for untaxed sugar(S

    nwi > 0), this will have a negative welfare effect

    I the stronger the correlation between i and Snwi

    I i.e. the more strongly consumers with large marginal internalities switchto other forms of sugar (fruit juice, chocolate milk, chocolate ...)

    I the larger will be this inefficiency cost from only taxing a subset of sugar

    Introduction A tax on soda Demand Estimates Analysis Summary 18 / 38

  • A tax on sugar in soda

    I Effect of a marginal change in the soda tax:

    dW

    d=

    i(i )|S

    wi |

    direct efficiency

    iiS

    nwi

    indirect efficiency

    i