The Effects of Taxing Sugar Sweetened Beverages

Obesity is becoming an increasingly larger problem in the western world, in the United States around 20% of all healthcare expenditure is accounted for by obesity related diseases (WHO, 2003). These diseases include cancer, strokes, type 2 diabetes and heart disease. Two third of all Americans is considered overweight and one third is considered obese. The Economic costs of diet-related diseases have been estimated to be at least $71 billion annually (Jacobson, Brownell). The Surgeon General estimated the total cost of obesity in the United States around $117 billion dollars for 2001 whereas Brownell et al. (2009) estimate the cost of overweight and obesity at $147 billion in 2009, which is 9,1% of the healthcare expenditures in the United States. In the Netherlands 48,2% of the population was considered overweight in 2011, 11,4% of whom were considered obese with the Healthcare Expenditures at 14,9% of the GDP (CBS Statline). Being overweight is the result of consuming more energy (calories) than one needs, to perform daily activities. As a result an individual will gain weight from overconsumption as the body stores the energy for later use. There are several theories that attempt to explain the trend that an increasingly larger part of the population is now overweight. Technology has taken away most of the manual labour, making work a more sedentary activity (Lakdawalla and Phillipson, 2002). Between office jobs, television and the internet, people’s lives are more sedentary than they were in the past, which results in lower demands for energy. On the other side we can see that eating habits have changed over the years. This is a result from the changing nature of the food supply (French, 2003). Over the years there has been an increase in the consumption of ‘foods away from home’. Because of this shifting dynamic the importance of marketing and food pricing in dietary choices has increased. Cheap food high in calories offer good value for money, while at the same time serving sizes have increased over the years (Young and Nestle, 1995). While the daily amount of calories required has gone down slightly over the years, there has been a steady increase in the amount of calories consumed. This has resulted in the increase of average bodyweight and increasing prevalence of obesity (Cutler, 2003). 5 In 1994, Kelly Brownell was the first to suggest that governments impose a so called ‘Soda Tax’. This can be a sales tax, excise tax or ad valorem tax to discourage people from purchasing sugar-beverages like soda, soft drinks or carbonated water. According to Vartanian et al. (2007) the increase in soda consumption has mirrored the increase in obesity rates. A study in the United States has shown that 9% of the total energy intake comes from sweetened beverages (Block, 2004). Another study has shown that a greater consumption of sugar-sweetened beverages is associated with weight gain and obesity in both children and adults (Malik, Schulze and Hu, 2006). The Netherlands is currently in the top five with regards to soft drink consumption in EU- countries. A possible solution for this problem for the Netherlands can be found in increased taxation of sugar-sweetened beverages like sodas and soft drinks, since the higher prices can reduce its consumption. Taxation can be an efficient way to reduce consumption since the Law of Demand dictates that higher prices lead to lower demand. Taxation is, compared to legislation, a very cost effective way to achieve policy goals and the additional tax revenues can help fund the Healthcare expenditures or can be used to subsidize more healthy food alternatives. In the Netherlands there is a low Value Added Tax on sodas and soft drinks since they are considered food products and a basic human necessity. We are interested in an increased tax on these beverages, either through an increase of the VAT to the high rate of 21% (for luxury goods) or through an excise tax per litre. To examine the possibilities of a tax increase we will have to look at the effects of such a policy, so in this paper we will research the following: “What is the economic impact of a tax on sugar- and artificially sweetened beverages in the Netherlands?” In this paper we will focus on three effects that we deem to be most prevalent. We will look at the increased tax revenues, we will look at price effects and we will look at the tax effects on the consumption of sugar-sweetened beverages. Lastly, we will study the effects of a tax on reduced consumption and estimate the effects of such a tax on the prevalence of overweight and its effect on the cost of healthcare.