Discriminatory taxes have unintended consequences

Discriminatory taxes can often have unintended negative economic consequences. Job losses are often a near-term effect of discriminatory taxes, resulting in not only lower consumer spending, but also in lower tax revenue from individuals that compounds these losses. For example, since the introduction of a discriminatory beverage tax in Mexico in 2014, more than 10,000 jobs have been lost and 30,000 mom-and-pop stores closed due in part to the tax1.
Discriminatory taxes can create a ‘black market’ for the taxed products and drive consumers across borders to shop. Denmark provides a compelling example, where the trans-border trade was so great that the soft drink tax was repealed in 2014, citing more than kr290 million (some €39 million) in lost revenue, due to illegal soft drink sales and people crossing the border to buy cheaper soft drinks2.
Discriminatory taxes can also have a ripple effect on local businesses, sparking disagreements between bottlers / distributers / retailers over who will carry the burden of the tax.
Discriminatory taxes disproportionately affect the poor, placing a greater burden on those with smaller incomes3.
Discriminatory taxes are State Aid by default. All discriminatory tax measures must be notified to EU authorities in order for them to assess whether they are compatible with EU law.

Examples of unintended consequences:

  • In Berkeley, California researchers found the soft drinks tax led to an increase of 26 calories per day as consumers shifted towards more calorific beverages such as milkshakes and smoothies which were not taxed4.
  • A 2014 study by the European Commission’s DG GROW stated that: “in all cases examined, it is found that there is some movement towards cheaper brands (manufacturers) or lower price stores (retailers) of the taxed products” 5. “Product substitution has important implications for the total health effects of food taxes because a food tax aimed at reducing consumption of one product or ingredient, may in fact increase consumption of other products6.
  • As a result of food taxes, people have less money to spend on other essential items. Research following the introduction of a food/drink tax in Mexico found consumers shifted spending from other categories, with money usually set aside for personal care and home care products being spent on products subject to the new taxes. The result was consumers bought less and overall volume of consumer products fell by 1.9%.7
  • Cross-border shopping in order to avoid taxation will impact taxed products but may also lead to other products being bought in another country, which will impact the whole weekly shop.
  • The detrimental effects of taxes on employment are widely acknowledged: “[T]here are large numbers of local SMEs that manufacturers work with, mostly active in bottling, packaging, advertising and retail. Therefore, food taxes may have a direct effect on local employment, as well as a trickledown effect on employment through the value chain.” 8. “In 2010, the employment in the Finnish beer and soft drink industry was 2,269 persons, and by 2013 this had been reduced to 1,980 persons. This equals a reduction of 12%9. Food price inflation between 2010 and 2017 was 2.2% in Europe10, which already raised prices. Food/beverage taxes will hit people even harder11.
1 The Economics Research Center at Universidad Autonoma de Nuevo Leon (UANL). “The Non-Alcoholic Beverage Industry in Mexico” (December 2015).

2 Scott-Thomas. Food Navigator. “Denmark to scrap decades-old soft drink tax.” (April 2013)

3 Oxford Economics, International Tax and Investment Center. “The Impact of Selective Food and Non-Alcoholic Beverage Taxes”, June 2016

4 Hanks, Andrew; Wansink, Brian et al., 2013. “From Coke to Coors: A Field Study of a Fat Tax and its Unintended Consequences”, Journal of Nutrition Education and Behavior 45, 2013: “Objective: Would the taxing of calorie-dense foods such as soft drinks help reduce obesity or lead to more nutritious lifestyles? (…). Results: The tax resulted in a short-term (1-month) decrease in soft drink purchases (p¼.04), but no decrease over a 3-month or 6-month period (p ¼ .24). Moreover, in beer-purchasing households, this tax led to increased purchases of beer (p ¼ .03). (…) Conclusions and Implications: To nutrition educators, this underscores the importance of investigating unexpected substitutions. To public health officials and policy makers, this presents an important empirical result and more generally points toward wide ranging contributions that marketing scholarship can make in their decisions”.

5 “Food taxes and their impact on competitiveness in the agri-food sector”, Ecorys report commissioned by DG GROW of the European Commission, 2014, p. 67.

6 Ibid, p. 46

7 2015 Analysis, Consumer Markets

8 “Food taxes and their impact on competitiveness in the agri-food sector”, Ecorys report commissioned by DG GROW of the European Commission, 2014, p. 63.

9 “Food taxes and their impact on competitiveness in the agri-food sector”, Annexes, Ecorys report commissioned by DG GROW of the European Commission, 2014, p. 119.

10 Organisation for Economic Co-Operation and Development (OECD), OECD Stats, 2017, available here

11 OECD, 2010. Healthy Choices, OECD Health Ministerial Meeting, Paris, 7-8 October 2010, Session 2, Paris 2010 (see here): “fiscal measures aimed specifically to change behavior are complex to design and enforce; their impact may be unpredictable as the price elasticity of demand varies across individuals and population groups; they can bear more heavily on low-income groups than on those with higher incomes”.