Should the Government Tax Unhealthy Goods?
- Dylan Viswanatha
- Mar 16
- 4 min read
A tax is a mandatory payment that is collected by the government from individuals and businesses, which is then used to fund public expenditures to promote social and economic welfare. As well as collecting tax from consumers and corporation tax from businesses, the government also imposes tax on goods considered unhealthy. These include duty rates on tobacco products, specific taxes that increase firms’ production costs for unhealthy goods, and taxes on unhealthy foods, such as sugar taxes on soft drinks.
The primary purpose of taxing unhealthy goods is to reduce their consumption, thereby improving the health standards of a population, promoting economic growth and incentivising a net welfare gain. Additionally, some may argue that these taxes generate additional revenue for the government because the goods having an addictive nature, making their demand price inelastic, meaning the quantity demanded will change less proportionally to the change in price.
Firstly, the government should implement specific taxes on firms that produce de-merit goods, such as tobacco and alcohol, to correct market failure. For example, the government recently announced that ‘the Corporation Tax main rate for non-ring fence profits would increase to 25% for profits above £250,000’ and that ‘A small profits rate of 19% was also announced for companies with profits of £50,000 or less.’ A specific tax is a tax per unit good which increases a firm’s cost of production and consequently reducing its supply. Initially, whilst the free-market equilibrium is where the marginal private benefits (MPB) intersect with the marginal private costs (MPC) at (Q,P), the specific tax will cause a shift in the marginal private benefits to the left, which forms a new equilibrium at (Q1,P1). Since the quantity that is produced with the tax (Q1) is closer to the optimal quantity (Q*) which includes the external benefits and costs as well as those that are private, this can reduce the overproduction of de-merit goods such as tobacco and alcohol, thus reducing the impact of negative externalities that affect society such as low productivity and additional healthcare costs that comes from the consumption of alcoholic drinks, thus reducing the social deadweight welfare loss to society. Therefore, specific taxes on firms that produce de-merit goods can correct for market failure by reducing the misallocation of resources that is left to the free market by internalising the externality.
However, whilst government monitored duties on de-merit goods may be beneficial to reduce overproduction, they may be insignificant in the long run due to the presence of the informal economy and illicit markets which evade taxation. According to HMRC on Gov.uk, the illicit market for tobacco duty and related VAT was worth a value of ‘£2.8 billion in 2021 to 2022’, which is mainly felt by the most disadvantaged and most deprived socioeconomic groups. This is described to ‘fund the smuggling of weapons, drugs, and even human beings across the globe’. Therefore, increasing taxes on firms may be insignificant for tackling the overproduction of de-merit goods.
Furthermore, the government could impose a soft drinks industry levy (SDIL), or sugar tax, on drinks with high-sugar content. This is simply a levy-applied to soft drinks containing added sugar, which was announced in George Osborne’s budget in March 2016, and came into force from April 2018. The levy is paid to HMRC by the packager in the UK, or importer for drinks produced overseas. This includes 18p per litre on soft drinks containing 5g to 8g of sugar per 100ml, as well as 24p per litre on soft drinks containing more than 8g of sugar per 100ml.
The imposition of an SDIL would be largely beneficial as it would promote better public health, especially the problem of obesity by reducing average cholesterol levels. This would benefit the UK economy and the NHS as there would be reduced strain to support patients with obesity, thus reducing obesity-related NHS expenditure.
Additionally, the figure above supports its effectiveness. Between 2015-2019, the total volume of:
High levy and low levy drinks sold dropped from approximately 1.2 billion litres to 0.5 billion litres.
Non levy drinks sold increased from 2.3 billion litres to 3.55 billion litres.
This clearly demonstrates that SDIL has effectively reduced the scale of high sugar content drinks, making it a large scale and impactful policy.
Although, as prices for high-levy drinks have increased, studies have reported a range of pass-through rates from 31% (7.5p/litre) to 140% (33.6p/litre), meaning the tax is regressive. A regressive tax means that people who earn the lowest amount of income will pay a greater proportion of their income in the form of tax compared to people who earn more, making them worse off. This would cause socioeconomic instability in the future for the UK economy due to an increased wealth gap.
To conclude, the implementation of taxes, such that duty rates on the market for tobacco and sugar taxes on high-sugar content drinks, has significantly positive impacts on the production and consumption of goods that are unhealthy, allowing for less health risks and a more productive economy. Whilst illicit tobacco is predominantly targeted in the most deprived members of the UK population, inflation-linked benefits and tax credits have risen by 6.7% from April 2024 according to the Budget 2024 ensuring a greater level of equality among the population and ensuring that people move away from the consumption of demerit goods. This would guarantee that less people are susceptible to the regressive sugar tax and therefore making tax implementation on unhealthy goods successful.
By Dylan Viswanatha, Year 13