John Locke Update / Research Brief

Imposing Costs on Others: A Dishonest Reason for Taxing Sugared Drinks

posted on in Economic Growth & Development, Fiscal Insight, Health Care, Health Care & Human Services, Spending & Taxes
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In the main, there are two reasons given for taxing soda and other heavily sugared products, including sugar itself. (I should point out that sugar is already subject to a federal tax in the form of an import tariff that makes the price of sugar over 50 percent higher in the U.S. than in the rest of the world.) The first reason is purely paternalistic, meant to protect people from what others believe to be their own bad choices. It is the classic “sin tax” argument that has been used to promote government-defined virtue for hundreds of years. For example, former New York City mayor and potential 2020 presidential candidate Michael Bloomberg sees them as “health taxes,” meant to promote “public health.”  In reality, the promotion of public health means the manipulation of private behavior through some form of government coercion. In this case, it is government coercion through taxation.

This article, though, is not about the paternalistic case made by Bloomberg and others for such taxes.  Rather, it will address the seemingly more sophisticated argument made by many economists. This is typically referred to as the “social cost” or “externalities” argument for such taxes.

The argument is that the state is going to tax you, not simply for your own good but for the good of society. Proponents of this view argue that the consumption of sugared products contributes to obesity, which leads to increased incidence of certain diseases that impose costs on society, not just those who choose to consume the products. It does this by imposing costs on government-funded health care programs—Medicare, Medicaid, VA, etc. So, the tax serves two purposes. First, raising the price of it presumably incentivizes people to reduce their consumption of sugared products. This, in turn, will reduce the obesity-associated health problems, thereby easing the burden on the nation’s socialized health care programs.

Economists call these kinds of costs “social costs” or “negative externalities.” They are costs that are external to the person choosing and benefitting from the choice. The economic analysis behind this derives from what is called “market failure” theory. In other words, it applies when these kinds of “external costs” are generated unintentionally from production or consumption activities that might occur in a free market. Air pollution is an example that is typically given. But with respect to health care costs, the negative externalities are not generated because we have a free market but because we don’t.

To invoke the economic case for externality taxes that might apply in the case of air pollution, for example, is completely disingenuous. Under our current system, where well over half of all health care costs are paid for by government programs, the fact that these costs are being generated by some people and borne by others is not an accident. Programs like Medicare and Medicaid were designed to do exactly that. Their sole purpose was to take what, in a free market would be costs that were borne by those who generated them and “socialize” them. In other words, they were designed to create external costs where they would not otherwise exist. The fact that the health care costs of some people who suffer from obesity-related diseases are borne by others through socialized health care programs, simply means that these programs are working exactly as intended. To then use this fact as an excuse to tax particular behaviors that generate certain health care costs for the system is not only bad economics but dishonest public policy.

There is a second problem with using the social cost argument for soda and sugar taxes. The tax penalizes everyone who uses the taxed products, whether or not their use imposes costs on others. Everyone who consumes sugared drinks like soda, for example, does not suffer from obesity or cardiovascular dieases. And even if they do, they do not necessarily foist the costs of those diseases onto others. If a person pays out of pocket for their health care expenses or is privately insured and not using taxpayer-funded health care programs, then that person should not be subject to the tax. There is nothing in the economic theory of externalities that justifies taxing people who are not part of the problem. And, clearly, those in the categories mentioned are not.

The fact is that, apart from paternalism, there is no rigorously meaningful justification for taxing soda or other sugared products separately and more intensely than anything else. If consumption of these products impose costs on others as social programs are meant to do, then the special taxation of any risky behaviors – from the eating bacon and fried chicken to skiing and mountain climbing – would also be justified. To tax sugar on the grounds that its consumption can impose costs on others is not just bad policy. It is bad policy that can quickly become a slippery slope. The fact is that this argument is little more than an excuse for government manipulation of unfashionable behavior. It does demonstrate, however, one of the true dangers of any form of socialized health care. Ultimately it can be used as an excuse by government to control any behavior that people with political power deem to be unhealthy. It is just another reason why government-paid health care challenges the very foundations of a free society.

Roy Cordato is Senior Economist and Resident Scholar at the John Locke Foundation. From January 2001 to March 2017, he held the position of Vice President for Research at the Locke Foundation. He is also an adjunct faculty member in… ...

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