Here's the executive summary...
In March 2016, George Osborne announced a ‘sugar levy’ on soft drink companies to start in April 2018. Under this policy, companies will be taxed on sales of medium and high sugar drinks (excluding fruit juice and milk-based drinks).
As an anti-obesity policy, the sugar levy seems arbitrary. Consumption of both sugar and sugary drinks has been falling for years while obesity has been rising. Soft drinks make only a small contribution to average calorie intake. Comparisons between European countries show no correlation between sugary drink consumption and obesity.
There is unambiguous evidence that ‘sin taxes’ of this sort take a greater share of income from the poor than from the rich. Since low income groups tend to buy larger quantities of SSBs, the impact of the sugar levy will be particularly regressive.
The Office for Budget Responsibility says the levy will increase inflation by a quarter of a per cent in 2018-19 thereby adding £1 billion to accrued interest payments on index-linked gilts. The inflationary effect will raise the cost of index-linked salaries, pensions and benefits by many millions of pounds. The levy will also require additional funding for enforcement and administration. For the first few years, at least, the sugar levy will be loss-making.
Hopes of extensive reformulation to reduce sugar content in the soft drink market are highly unrealistic. There is no more sugar to be removed from diet drinks and companies will not change the recipe of their popular original brands. Instead, the levy gives companies the perverse incentive to raise sugar levels up to the threshold of each tax bracket.
It is bizarre to introduce a tax when you know that it will incur billions of pounds of additional costs, and the stated objective of getting soft drinks companies to reduce the amount of sugar in their products is a pipe-dream.
50 per cent of the carbonated drinks market is already made up of low calorie brands. Regular Coke and Pepsi make up a further 24 per cent of the market - and they are not going to be altered. That leaves only a quarter of the existing market that could plausibly be reformulated but it includes such brands such as Irn-Bru and Dr Pepper which are unlikely to change (both have diet versions that sell modestly) as well as brands such as Lilt and Oasis which have already been reformulated to bring them below the lower-tier 5g/100ml sugar limit. For the latter category, the levy provides no incentive to reduce sugar levels further. On the contrary, since consumers tend to prefer the taste of sugar to the taste of artificial sweeteners, the levy gives manufacturers a perverse incentive to raise sugar levels in reduced-sugar drinks up to the limit of whichever tax bracket they are in.
I think the sugar tax is a bad idea on principle but it also happens to be a terrible idea in practice.
I've written more about this for Spectator Health.