Berkeley, California's new soda tax can't both curb obesity and raise significant tax revenue.  No.  Curbing obesity suggests a relatively elastic demand.  Raising significant tax revenue suggests a relatively inelastic demand.  Ramsey-optimality means raising that revenue with the least excess burden (deadweight loss, for the traditionalist.)  The authors of a U. S. News commentary miss this point.
The biggest problem is that advocates treat the tax as a twofer. They argue that the tax would both decrease soda consumption and raise revenue, which could then be used for health programs. However, if the tax raises substantial revenues, it would in fact be a failure. The measure’s ultimate goal should be to ensure that no one actually pays the soda tax but switches to healthier non-taxed options instead.
Depends on what the goal is. Perhaps the demand for pop is relatively inelastic, and the tax pays for the additional health programs the city expects to provide for the widebodies.  Perhaps that's a private-public bundle.  But if the tax induces all sorts of substitutions, there are neither revenues for the health programs, nor the widebodies making use of the health programs.

It gets less coherent from there.
Note that the city imposed the tax on soda distributors since Berkeley does not have the authority to pass a sales tax directly. But the measure’s advocates hoped that the distributors would pass the tax on to consumers, making it effectively a sales tax.
A little understanding of elasticity can cure a lot of wishful thinking.  How much of an increase in the price of a case of pop induces shoppers to buy it in Martinez or Pleasanton instead?  Answer that, and now you have the incidence of the tax.

That, however, brings a different challenge in train.
This is particularly relevant since sales taxes are the most regressive type of taxation – falling disproportionately on the lowest income individuals, since the poor spend the highest share of their income on foods. If Berkeley’s stated goal is to raise revenues through tax to support its health initiatives, the city expects its poorest citizens to bear an uneven share of financing its programs. Raising revenues by taxing the poorest individuals is hardly a successful policy. In fact it would be difficult to imagine another policy that burdens the poor with such targeted precision.
Well, the United States is the only country in the world in which obesity and poverty go together.  The people who receive the benefit of the health programs bear the burdens?  Discuss.
The problem with the way the soda tax is implemented, however, is that the city treats the policy as a settled issue rather than an experiment. It does not account for the possibility that the policy may fail. In fact the city’s decision-makers do not even bother to outline what they would consider a success for the soda tax in terms of reduced obesity. They have not announced any plans to track the tax’s impact on obesity rates. Thus, even if the policy fails to reduce obesity, the tax will likely continue. It may sound great for the municipal government looking for greater tax revenues but it would hardly serve the needs of its citizens.
Let alone, set out any revenue expectations that have been calculated on a sensible basis. Governing well is hard, even in a community full of Smart People.
Berkeley’s experience could offer health professionals and policymakers valuable information on the effectiveness of taxes in reducing calorie consumption and improving the American diet. However, in order to make the policy successful, Berkeley must set out clear criteria for success and plan to rescind or modify the tax if it does not succeed. The criteria should be two-fold: The tax must reduce obesity but at the same time ensure that the share of income the poor spend on food does not increase. Ultimately, the policymakers must keep in mind that anti-obesity policies should help people make better choices, not punish them for making mistakes.
These two criteria, however, are at odds. Economics is often like that, the policy-maker has to make trade-offs.  It might be more productive to say "We will find this much reduction in obesity accompanied with that much additional expenditure by our poor on food a successful policy.  The same reduction in obesity with more than that expenditure will not be in the public interest."

No comments: