Those governments looking to fill gaps in public expenditure or even ‘reinvest’ in health infrastructure with money gained from taxes disguised as public health measures are likely to be sorely disappointed. The nature of taxing food and beverages and the unintended consequences on the broader economy; from lost revenue and changing buying patterns means that gains made on discriminatory taxes are likely to be lost in other areas.
It is unrealistic to assume that food and non-alcoholic beverages will efficiently raise government revenue for the following reasons:
- Price elasticity
To generate tax revenue, a tax should generally be applied to products that are price inelastic (i.e. products whose consumption falls less than proportionally when their price is increased). The consensus across the academic literature is that most food and non-alcoholic beverages are price inelastic. This means that the effect of an increase in prices is difficult to predict and cannot be estimated.
- Impact on other taxes
Such a tax would potentially reduce other forms of tax revenue (e.g. corporate income tax and employment-related taxes) that are paid by producers, wholesalers and retailers of the taxed products, and their associated suppliers and employees.
- Shopping over the border
The tax would also promote trans-border purchasing from consumers attempting to avoid the tax increase. Depending on the country, this may occur on a very large or limited scale.
- Inherent administrative costs
The design, monitoring and enforcement of the tax, would impose significant administrative costs on government making the process long, complicated and not as economically fruitful as expected.
- Regulatory burden
Increased costs to business: to avoid the burden imposed by discriminatory taxes and the implications for a company’s profits, certain businesses may even chose to relocate operations to other states or regions where operating costs are lower.
Find below a selection of relevant studies and media articles about how food and drink taxes will not result in increased revenue for governments: