LETTER: Sugar tax ramifications

The sugar tax cannot be evaluated seriously unless account is taken of the product’s elasticity (“DA opposes sugar tax while others call for it to be widened”, January 20).

This economic term references what percentage sales come down given a percentage price increase.

Given the stated objectives of the sugar tax, this number is crucial in deciding not only its efficacy but also the damage it does to industries more broadly. Consider the two extremes: a completely elastic demand curve means a 10% tax equates to a 100% reduction in sales. This would definitely achieve the stated health policy but would imply total destruction of the industry. What about a completely inelastic demand curve where a price increase makes no difference to sales? Instead, the product is bought in exactly the same volumes but the consumer now has less income for something else in her shopping basket. This tax is simply felt and paid for by non-related industries. And then there’s everything in between.

So what can we say about the demand elasticity for sugar? We know some tax was collected which means some consumers were inelastic to the change. This just implies hits to unrelated industries. For the sugar industry generally, we know there were some job losses so demand was obviously somewhat elastic. The lesson is that a tax on a targeted product will only ever partially work in lowering consumption.

What would we consider success? Total rejection of the product is just equivalent to a ban. Worse, any payment of the tax means reduced income somewhere else in the economy. No-one notices those jobs lost but they’re just as real.

Neil Emerick
Free Market Foundation

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