In the last few days, we have seen a renewed call for taxes to reduce the consumption of sugar. However, such so-called fat taxes have in the past proven utterly ineffective and highly regressive. Indeed, Denmark’s ill-fated attempt at a fat tax was so astonishingly awful that even their current social-democratic government saw fit to abolish it.
The idea of a tax on sugar in the UK would be to internalise the externalities created through its consumption. Too high consumption of sugar can lead to obesity, diabetes and other personal health problems which exert social costs. These social costs manifest themselves for example through higher state health expenditure and lower labour productivity. The aim is to increase prices to reduce consumption. Although, if Denmark’s example is anything to go by, such taxes as they are currently conceived are bound to fail.
Denmark’s policy taxed all foods which contained more than 2.3% saturated fat at a rate of 16 Kroner (£1.50) per kg of saturated fats in a product. However, the Danish government displayed a woeful ignorance of the concept of price elasticity of demand, which is ultimately the responsiveness of demand to changes in prices. By hitting everything from beef to butter to biscuits, the tax targeted mostly everyday essential products that people buy regardless of price i.e. demand is price inelastic. However, like their Viking ancestors, Danes didn’t just sit around but went abroad to Germany and Sweden replacing their Longboats for Volvos and looted treasure for fat-tax free food. The percentage of Danes carrying out cross border shopping rose from 30% to 48%.
Despite raising 1.3 billion Kroner (£150 million), the complexity of the system led to high admin costs and confusion amongst retailers; for example, beef faced a 0.83% tax rate, duck 1.94% and turkey was tax-free. However, even if there was a tightly defined and contained definition of what would be taxed, there is evidence from Fletcher, Frisvold and Tefft that such taxes would simply lead to higher consumption of other foods deemed unhealthy. Moreover, once a tax on sugar has been established, further taxes on other food and drinks will not be far away.
As has been highlighted, the fat tax in Denmark led to falls in production within the country and according to the Danish Chamber of Commerce, led to the loss of 1300 jobs. Furthermore, it is estimated that even if the tax was in place for 10 years, it would lead only to a 5 ½ day increase to average Danish life expectancy. This doesn’t seem like a particularly effective way of improving health. What cannot also be ignored is that a sugar tax would disproportionately hurt those on low incomes. The evidence is clear; as Chouinard and others show, the elderly and poorer consumers suffer much more than younger and richer consumers from fat taxes.
Ultimately, despite being well intentioned, Denmark’s fat tax was a dreadful policy. Achieving neither efficiency nor equity, it was the personification of the nanny state – bureaucratic, ineffective and regressive. Danes are celebrating its abolition and we should think seriously about the evidence and the impact on families before embarking on the same path.