The great British sugar scam

Published in The National Business Review (Auckland), 1 April 2016

As the UK is heading for its referendum on EU membership, one might assume Prime Minister David Cameron’s entire focus would be on this once-in-a-generation vote. What could be more important than finally settling Britain’s uneasy relationship with Europe?

Well, as it turns out, tampons and sugar might well be. Or at least the way both are taxed.

A couple of weeks ago, Mr Cameron proudly announced that he had received a concession from the EU that would allow him to reduce value added tax on sanitary products to a zero rate.

Previously, this so-called “tampon tax” had a reduced rate of 5%. This not only angered feminists but also demonstrated how little room for manoeuvre the EU has left its member states for setting national policy.

What a great victory therefore to repatriate the right to determine taxes on sanitary products. Future historians will rightly put Mr Cameron in a proud line with other defenders of the realm from Sir Francis Drake to Lord Horatio Nelson and Sir Winston Churchill.

Political circus

Though the tampon tax at least has a link to Britain’s EU membership, albeit a faint one, the sugar tax is just pure political circus. It is a sweet distraction from the more pressing, serious and important issues of government. In that sense, it is almost as good as debating a new flag.

At least the sugar tax claims to address a real problem: child obesity. Everything else about it is slightly surreal, to put it mildly.

To start with, the tax won’t raise a sugar cube in the ocean of government finance. If everything goes according to plan (and what does?), it will yield £520 million a year. To put it into perspective, the UK budget deficit stands at £55 billion.

Okay, you might say, the limited scope of revenue-raising for HM Treasury does not matter. Taxing sugar is not about the money but about reducing the amount of sugar consumed. Fair enough. But then it is surprising what is taxed – and what is not. Though they call it a sugar tax, it is actually a fizzy sugary drinks tax.

Chancellor of the Exchequer George Osborne probably did not draw up his tax plans over a Starbucks coffee. Otherwise, he might have realised the great irony in the tax he is about to introduce.

Starbucks’ “Mulled Fruit – Grape with Chai, Orange and Cinnamon Venti” holds the record for the most sugary drink available anywhere in the UK. If a spoonful of sugar makes the medicine go down, Mary Poppins could serve you the contents of a travel aid kit with this monster of a drink. It contains 25 teaspoons of sugar – or 99g. By comparison, a standard can of Coke has about two-thirds less sugar.

Under Mr Osborne’s tax, however, coffees like this are exempt from the sugar tax, no matter how sweet they are. In fact, any milk-based drinks or fruit juice will not be liable for taxation.

Not just in fizzy drinks

It may not have occurred to the UK government but sugar does not only come hidden in fizzy drinks. It is prevalent in muffins, chocolates, fruit yoghurts, canned soups, salad dressings, tomato sauce, dried fruits and bread. Will there be a sugar tax on any of them? Of course not.

So let’s be clear, the so-called sugar tax is just a fizzy drinks tax. But even as such, it does not have logic on its side, as the respected Institute for Fiscal Studies has pointed out.

The problem is that there will be two tax rates: drinks with a total sugar content above 5g per 100ml will be taxed 18p per litre. Drinks with a higher rate of more than 8 per 100ml will attract a tax of 24p per litre.

What sounds straightforward actually means that once a drink is beyond the higher threshold, adding extra sugar actually reduces the tax per 100 grams of sugar. In this way, the sugar in Coca-Cola (10.6 grams per 100ml) will be taxed at 23p per 100 grams. But the same amount of sugar in a typical energy drink (15.9 grams per 100ml) will only attract 15p.

If the idea behind the tax was to move customers away from the white stuff, then clearly this policy setting does not make much sense.

Bad tax design

Then again, it does not make sense in any case. That is because consumers will not pay the tax directly. It is up to the producers to pay the levy and they decide how to recoup the money from their customers. In this way, a company such as Coca-Cola will spread its extra costs over all its brands, which include bottled water and juices.

With a different design of the tax, the UK government might have overcome these technical issues. And still, even then the tax would not have worked. The main problem with sugar taxes, from all we know, is that they do not change behaviour in the way they intend to.

There is just no evidence that a smallish tax on fizzy drinks will reduce the overall sugar intake of those consumers the legislation is meant to protect from themselves. Even if there were a reduction in the demand for fizzy drinks, the availability of untaxed forms of sugar leaves the measure powerless.

So the best things one might say about the sugar tax is that it is ineffective. The worst thing is that it hits the poorest households hardest.

Because let’s face it: consumption of soft-drinks is relatively more prevalent in households from lower socio-economic backgrounds. Meanwhile organic, hand-squeezed fruit juices and soy-decaf lattés are the prerogative of the haute volée – and remain mercifully untaxed. Seen from this perspective, it really looks like an old Tory tax – not like the progressive kind of tax Messrs Cameron and Osborne would like it to be. Let them eat cake (and drink Coke)!

Education is better

If you really care about obesity and nutrition, and if you want to reach people from lower socio-economic backgrounds, there would be a better alternative: Educate them, don’t just tax them.

In all of this, perhaps we should still be thankful that they are only introducing a new tax. It could have been worse, a lot worse.

Back in 2007, when the Conservatives were still in opposition, they were toying with another idea for reducing the sugar content of food and beverages. It was not a tax but effectively an emissions trading scheme. It would have assigned tradeable rights to food producers for the use of sugar in their products. If you think the fizzy drinks tax is bad (and it is), imagine what a sugar trading scheme would have looked like.

With the so-called sugar tax introduced, the tampons tax abolished and the budget deficit marginally addressed, perhaps Mr Cameron and what remains of his cabinet could now seriously debate what is important to them: how to harmonise soft-drinks taxation in the EU.

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