Economic Analysis: David Cameron should drop his wrong-headed opposition to sugar tax

Does taxation change behaviour? Of course it does.

I’ve carried a folded-up plastic bag in my coat pocket since the “bag tax” was introduced in October.

Tax breaks encourage investment. And the Chancellor’s hefty stamp-duty rise will deter many would-be buy-to-let investors from splashing out next year, which the Bank of England thinks is probably a good thing.

So why, then, the huge fuss about the biggest no-brainer of the year so far — a 20% tax on sugary soft drinks?

After MPs backed the tax this week, the free-marketeers inevitably filled the airwaves, screaming at the “nanny state” and accusing politicians of hitting the poorest households.

But frankly, isn’t that exactly the point? This issue centres on education and class.

According to the National Child Measurement Programme, childhood obesity is strongly linked to deprivation: the most deprived are twice as likely to be obese, both at reception age and aged 11.

Public Health England also reports widening “health inequality” between the most affluent and poorest parts of society.

Don’t forget the National Diet and Nutrition Survey, which found higher sugar intakes among adults in the lowest income group, compared with all the others.

Steven Landsburg, a professor of economics at the University of Rochester in New York, once pithily summed up his subject saying, “people respond to incentives. The rest is commentary”.

What critics of the MPs’ tax proposal miss — or wilfully ignore — is that the levy is meant to steer people away from unhealthy soft drinks, not tap them up as a revenue stream forever.

This isn’t a genuinely regressive tax such as the Chancellor’s recent hike in insurance premium duty, an all-encompassing hit because drivers across the income divide are forced by law to insure a car.

Critics also claim the impact of these taxes is not proved. But early findings from Mexico quoted in the MPs’ report show a 6% reduction in sales of sugary drinks in 2014, with a bigger, 9% drop seen in less affluent households.

The University of Chicago’s Jeffrey Grogger, who published a paper on the Mexican tax in May, says it had a “relatively powerful” effect — pushing up prices 12% — and adds that the results “provide reason to think that the tax may ultimately lead to weight loss”.

There have been a few flops. In Berkeley, California, a sugary-drinks tax pushed up prices by around half the expected amount as retailers absorbed the extra charge — and for mega-brands Coke and Pepsi, only 22% of the tax was passed onto consumers.

Researchers put that down to retailers’ worries over people just shopping outside the city.

Denmark’s “fat tax” on saturated fats was scrapped after a year when it emerged that retailers were cutting local jobs because Danes chose to shop in north Germany instead.

And experts fretted that bingeing on alternatives — carbohydrates such as white bread and rice — could be just as damaging for public health in the long run.

But a blanket UK-wide sugar tax would avoid these pitfalls. And don’t forget that while libertarians bang on about freedom of choice, those choices (such as smoking) come with consequences — in the case of sugary drinks, the £5.1 billion a year the NHS spends on treating obesity, paid for by you and me. Economists call these “negative externalities”.

So if people want to make a choice that’s bad for them that puts a burden on wider society, why shouldn’t they pay for it? They might stop doing it.

This isn’t just about tax: advertising clampdowns on sugary calorie-fests and a bigger emphasis on PE in schools would also help.