Discuss whether indirect taxes on sugary food and drink should be increased

An indirect tax is a tax where the burden of the tax falls largely on the consumer but it is actually paid by the producer. Examples include Value Added Tax, excise duty and sales taxes.

Indirect taxes on sugary food and drink will increase costs for producers so they cause the supply curve to shift to the left. The cost of the negative externalities is internalised in the price of the good, this may reduce demand for the good and the level of its production, eating sugary food and drink will increase the likelihood of obesity, early death, depression and certain heart disease. Poor health will also adversely affects work and productivity. Higher prices would discourage people from consuming unhealthy foods. Reducing consumption of sugary foods would have a significant impact in improving health. Also, adding tax on sugar can create an incentive for firms to supply alternatives which are healthier. If firms have incentives to promote healthier foods and drinks with substantially lower sugar content, then consumers will to an extent follow the supply. Moreover, taxes raise revenue for government, this can be spent on alternatives like tax on cigarettes could be used for funding government services to help people to stop smoking.

However, it is difficult to measure the level of negative externality. Demand for sugary and drink tend to be price inelastic, so higher taxes will not reduce demand much. Sugary foods are demerit goods. Demerit goods are goods whose consumption is regarded as being harmful to the people that consume them, but people are usually unaware about the harm that the demerit goods can cause. Due to imperfect information, consumers might not have enough information on how it might affect their health, so their demand for the sugary food is higher than it should be and it is overprovided. Instead of putting taxes on the sugary food and drink, government can subsidies some advertising campaigns encouraging healthy eating, or set regulation on unhealthy foods by limiting the amount of sugars. It could be more effective in reducing excess sugar consumption,

Conclusively, I believe indirect taxes on sugary food and drink should not be increased. A sugar tax has undesirable social and economic consequences. The sugar tax is regressive because it will takes a higher percentage of income from those on low incomes. Also, taxes on sugary food may lead many consumers to replace the taxed food with equally unhealthy foods. However, it depends on the elasticity of the goods and also the government have to consider whether an indirect tax negatively affect competitiveness and trade.