Thursday, 2 March 2017

Sweet storable substitutes

A couple more important points on the Mexican soda case.

First from the comments on Tuesday's post:
Mexicans also love to drink uncarbonated sugary drinks, like horchata, and drink more of those now carbonated beverages are more dear. Much of that market doesn't go through regular retailers, being sold by street vendors and cafes, so I doubt they have any idea how much is being drunk.

The Public Health people are also very naughty about their moving target. They say "sugary drinks", but they can't ever mean that, since they would have to tax a whole bunch of fruit juices. Sometimes they move to "soda" or carbonated, but I'm guessing that they won't include any wines in that.

What they want to tax is just the cheap soft drink that the naughty fat poor people drink. By the time they divide the market down to that sector the effect will be trivial, even should it work. The weirdness of taxing soda drinks but not taxing lollies that are almost pure sugar seems to escape them.

If they were honest they would want to slap an excise on all sugar, everywhere. The effect would be to just raise the cost of food and piss people off. But if they actually want to cut down the amount of sugar consumed, that would be the only logical step.
When the Mexican tax came in, I asked whether anybody was keeping track of this.
Other fun questions I've not elsewhere seen asked:
  • The Mexican tax seems to be per litre of sweetened beverage, regardless of sugar content. If I lived in that environment, in places where customers have access to clean water, I'd sell a concentrated syrup for dilution at home rather than a ready-to-drink product. I wonder whether anybody there is doing that. Alternatively, I'd sell a bottled sugar-free product with a sugar sachet attached to it with a rubber band. Mix your own!
  • Even if things aren't turning into syrups, you should expect an increase in the sugar concentration in sugary beverages: taxed for a teaspoon, taxed for a cup.
  • I don't know whether the tax applies to just a bag of sugar at the supermarket. There is an 8% ad valorem tax on "a defined list of non-essential highly energy dense foods". A bag of sugar is pretty cheap. Even if the 8% tax applies to it, an 8% tax on a kilo bag of sugar has got to be cheaper than a peso-per-litre of sugar-sweetened beverage. 
  • Enterprising children should surely be setting up lemonade stands and dodging the tax man. Here's a recipe for Mexican lemonade: about a quarter cup of sugar per litre. A kilo of sugar is 5 cups, so 20 litres per kilo. That would draw 20 pesos in excise tax alone, were it taxed as a beverage. I suspect that the kilo of sugar itself would retail for less than that, with or without an 8% ad valorem tax.*** Sweet sweet tax-dodging lemonade stands.
  • One also wonders about whether any of the purchased bottled water to which folks are substituting is being used in untaxed home production of lemonade. The folks who have the Nielson household sales data should be able to tell whether purchases of sugar have changed. Why wouldn't you check that and report on it?
There are more consistent advocates out there who've pushed for comprehensive sugar taxes, but I expect those advocating for soda-only are aiming for salami-slices. Put in a low and politically palatable soda tax, find out (surprise surprise) that it doesn't do anything, then broaden the base and hike the rate by salami slices until you're at the more comprehensive setup that always made more sense, given the objective, but would not be politically saleable.

Second, do remember that soda can keep for a while in the cupboard. If you buy lots of it when it's on sale for consumption over a longer period, then your measured price elasticity of demand will overstate your true price elasticity of demand. The University of Massachusetts, Amherst's Emily Yucai Wang covered this in the RAND journal in 2015 rather well; here's an ungated version.
The typical analysis on the effectiveness of soda taxes relies on price elasticity estimates from static demand models, which ignores consumers' inventory behaviors and their persistent tastes. This article provides estimates of the relevant price elasticities based on a dynamic demand model that better addresses potential inter-temporal substitution and unobservable persistent heterogeneous tastes. It finds that static analyses overestimate the long-run own-price elasticity of regular soda by 60.8%, leading to overestimated consumption reduction of sugar-sweetened soft drinks by up to 57.9% in some cases. Results indicate that soda taxes will raise revenue but are unlikely to substantially impact soda consumption. 
She also finds the taxes to be regressive not only because poorer households consume more soda, but also because their demand is less price elastic.

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