Rachel Griffith, CBE FBA
Professor of Economics, University of Manchester
Research Director, Institute for Fiscal Studies
Corrective taxes have long been used to improve social welfare when consumption imposes costs on others; alcohol, fuel and tobacco consumption are leading examples.
The welfare improving properties of these taxes is due to their ability to correct behaviour that generates costs that the individual does not fully take into account when
making consumption decisions. Although much attention has been paid to costs that are borne by others ("externalities") the same logic can be applied to costs that are borne
by the individual's future self ("internalities"). Taxes have therefore been advocated as a way to improve welfare by correcting consumption that generates internalities.
Taxes on nutrients or certain types of foods are a prominent example of a policy motivated by a desire to reduce the costs that individuals impose on their future selves. For example, there is concern that excess sugar consumption is contributing not only to growing rates of obesity, but also to other diet related diseases, including diabetes, cancers and heart disease and that excess consumption is particularly detrimental for children. There is also evidence that poor nutrition, particularly early in life, leads to poor later life outcomes. The costs generated by poor nutrition therefore comprise both an external and an internal component: costs to the public healthcare system are borne by society, but the effect on social and economic outcomes are mainly borne by the individual themselves in the future. Both the externalities and internalities of poor nutrition mean that it is seen as a major public health problem that requires government intervention. However, the bulk of the public health literature has focuses on how policy should be used to reduce various health or nutrition outcomes (for example, reducing the amount of sugar people eat), without making explicit the nature of the market failure that policy is aiming to correct, and without considering the potential costs that such policies might impose and some individuals.
In this work we aim to bring together insights from the optimal tax literature and the public health literature to consider the designed of sin taxes. Optimal tax design involves trading off the welfare gains of reducing externalities or internalities, with the welfare losses due to the reduction in consumer surplus due to the tax. We also use this set-up to make clear how efficiency and equity considerations interact in designing corrective taxes.
Griffith, O'Connell and Smith (2016) "Sweetening the sugar tax?", IFS Observation, 16 December 2016
Griffith, Nesheim and O'Connell (2017) "Income effects and the welfare consequences of tax in differentiated product oligopoly", Quantitative Economics