In the UK, the Prime Minister’s new budget includes a two-tier tax that targets fizzy drinks. Its primary goal is to attack childhood obesity.
Taxes though are not always predictable.
What, Who and When
What is taxed?
Based on sugar content, the tax is highest for drinks like Coke and Pepsi with the price of a litre rising by as much as 24p. For Sprite and Fanta the increase is 18p a litre.
You can see below that sugar content varies considerably:
Who will pay the tax?
A supply side tax, manufacturers pay it but we can’t be sure how much they will pass on to the consumer.
On the demand side, 11 to 18 year olds will be most affected:
When will the tax be collected?
With 2018 the start date, firms have the time to lessen sugar content.
Our Bottom Line: Demand
On the demand side, lots is going on. The law of demand, elasticity and changes in demand because of substitute products and future expectations all could explain the response to the sugary drink tax.
The law of demand tells us that we are supposed to spend less when price goes up and more when it declines. However, to stop consumption, research has indicated that the soda tax needs to boost price by close to 20 percent. Otherwise, we could find ourselves in an inelastic demand range which means a change in price will have little impact on purchases. But then, if there is little impact and we keep buying soda, the tax will generate the revenue that the Prime Minister wants for primary school sports or perhaps to subsidize fruits and vegetables.
Citing a third concept, we should say that substitution might just kick in with other untaxed sugary items having their demand spike.
Or future expectations could increase sugary drink demand now:
You can see that a sugary drink tax takes us to a cookie jar filled with a variety of economic sweets.