Study suggests that sugar taxes are only effective if price tag mentions the tax
I read this article, but I don&#x27;t believe the conclusion, because it goes against my economic understanding of demand curves.  As far as I personally believe (though I only have one economics paper, and I&#x27;m no Warren Buffeett), adding taxes to any item must decrease quantity sold, regardless of the reason for the taxes or whether consumers know about it.<p>Here is something to think about:<p>- Suppose the retail price of sugar is $1 per pound today.<p>- Let&#x27;s think about the situation where adding a sugar tax <i>didn&#x27;t</i> decrease consumption. i.e. suppose that if after a tax consumers have to buy for $1.50 per pound still they will buy just as many as if they have to buy for $1 per pound. They are just not price-conscious.<p>Isn&#x27;t that possible?  That&#x27;s what the article says! It says that consumer buy just as many cans at $1.52 as $1.40, if they don&#x27;t know about the taxes!  So maybe they just don&#x27;t care about $0.12 that much, I mean is that going to stop you from getting a drink?<p>So, we can can sort of imagine that, right?  For the $1.50 versus $1 for a pound of sugar example, if you&#x27;re going to bake a cake, will having to pay $1.50 rather than $1 for the sugar stop you?  How can we know this isn&#x27;t the case? Perhaps it really is a situation where whether it&#x27;s $1 or whether it&#x27;s $1.50 has the same number of units sold, consumers just don&#x27;t care that much, unless you mention a big scary word like &quot;taxes!!&#x27; to them.<p>So, here&#x27;s something to think about if that&#x27;s the situation:<p>-&gt; If consumers are just as happy to pay $1.50 as $1, then <i>why don&#x27;t stores sell at $1.50 today</i>?  I mean they&#x27;d sell just as many, right! They&#x27;d just get an extra free $0.50 on each one! Why don&#x27;t they do that?<p>So is it out of the goodness of their hearts? Or, do they not know their customers, are they leaving all this money on the table, have they never experimented with prices?<p>No.  They don&#x27;t sell at $1.50 <i>because they would sell fewer units</i>.  Much fewer units.  So much fewer units that even 50 cents in free profits on each and ever unit would cause them to lose more customers than the free profits are worth.  That&#x27;s why they don&#x27;t set the higher prices - because <i>there is less demand there</i>.<p>This <i>proves</i>, though a bit informally, that taxes will always decrease demand: if they didn&#x27;t, the sellers would <i>already</i> have set their price at the higher quantity even without the taxes!<p>What is a more likely explanation?<p>So, I don&#x27;t believe the conclusion of the study.  It concludes that it is mere mention of the taxes that causes some people to reduce their consumption, and otherwise their consumption remains price-inelastic.  I think a more likely explanation is that by mentioning the sugar tax, consumers are reminded that the product has sugar in it, which they know makes them fat, is bad, and is so bad that it has a special tax on it.  This reminds them to choose another product.<p>How to test this explanation:<p>They could try selling sugar drinks at the same $1.40 as non-sugar drinks, and write on it &quot;Includes SF Sugary Drink Tax&quot; in the test group and not include that notice in the control group.<p>I would do it like this:<p><a href="https:&#x2F;&#x2F;ibb.co&#x2F;hXmGt9F" rel="nofollow">https:&#x2F;&#x2F;ibb.co&#x2F;hXmGt9F</a><p>(I would subsidize the taxes for the purposes of the experiment, by reducing the retailer&#x27;s profits).  I predict that the one that mentions the sugar tax should include fewer sold than the one that doesn&#x27;t mention it - because it reminds consumers that sugar is bad, which is what I believe is the explanation for the effect observed.)<p>The bottom line is, you can be quite sure that taxes work for sure to greatly reduce the number of units sold.  If the study concludes that without mentioning the sugar tax, consumers buy just as many at $1.52 as at $1.40, then why wasn&#x27;t it sold for $1.52 before the taxes?<p>Where this breaks down:<p>As I mentioned, you have to subsidize the price to match the $1.40 on the sugary drink.  You get less profit.<p>So perhaps the price will be set at $1.50 <i>with or without</i> the tax! It&#x27;s possible that the taxes just decreases someone&#x27;s profits, without impacting consumer prices.  The prices are set at &quot;the price the market will bear&quot; and taxes just impacts the profit margin on that.<p>From this point of view, a certain level of taxes might kill a market entirely: perhaps sellers can&#x27;t change retail prices, level &#x27;A&#x27; of taxes keeps sellers&#x27; profits at x, level &#x27;B&#x27; of taxes reduces sellers&#x27; profits by 50% so that they make only 0.5<i>x of profit, level &#x27;C&#x27; of taxes reduces profits by 75% so that they make only 0.25</i>x of profit, and level &#x27;D&#x27; of profits reduces sellers profits by 99% so that they make only 0.01*x of profit.  There is also some level &#x27;F&#x27;, where sellers would have to pay to subsidize consumers, or there are 0 units sold. The sellers will stop bothering to carry the products at all.<p>At very high tax levels, the only way the market clears is illegally, by not paying that taxes.  I don&#x27;t think retail outlets will start carrying sugar while trying to illegally avoid taxes on it, like they&#x27;re some illegal drug shop, so, at those prices the stores will just drop those items from their inventory.<p>Bottom line:<p>- Taxes decrease units sold.  It is a strong and real effect that is guaranteed to exist in all cases.<p>- There is a certain level of taxes at which products would not be carried at all.<p>- Taxes may or may not impact consumers as much as sellers - the taxes may merely decrease sellers&#x27; profits.<p>Taxes on sugary products work.  You don&#x27;t need to tell consumers about them.  They affect advertising too: if the price the market will bear is $1.52 with or without taxes, but sellers get less profit on the product with high taxes, they will stop advertising it as heavily, stop promoting it, stop carrying it.  Pepsi, for its part, will put more advertising into its Max product (sugar-free), which does not have taxes eating into its market.<p>Taxes work at artificially reducing quantity sold, and consumers don&#x27;t need to know about them for them to work.  It is impossible (according to my economics understanding) for the study&#x27;s conclusion to be correct: “If you tell consumers the true cost of the tax, it is no longer effective in reducing purchases.”<p>This cannot be correct in my opinion.  In my opinion, its conclusion cannot be correct: &quot;the bottom line, he said, is that if cities want these policies to be effective at reducing consumption of unhealthy beverages, they must mandate that tags mention the added tax – but not reveal how much it is.&quot;<p>On the other hand, I do believe the finding about labels (essentially: &quot;Hey! This has sugar in it!! It&#x27;s subject to a special sugar tax!!&quot;) is interesting in itself, and should be tested separately, without a price difference being a factor.  It is an interesting and worthwhile study and I agree with its authors&#x27; point of view that reducing sugar consumption is worthwhile.