Taxes go in and out of fashion. The hottest tax fad of 2010 is the "soda tax," usually interpreted as a tax extending to all sugary beverages, not just carbonated soft drinks.
The popularity of a soda tax is driven by claims that it attacks two of the country's biggest public policy issues: government budget deficits and health care costs. These claims are based on studies in the medical literature that show a strong link between soda consumption and obesity, and in turn, between obesity and rising health care costs. Several states, most recently Washington, have already instituted soda taxes, and the proposal is under consideration at the federal level.
The effects of a soda tax would depend, among other things, on the elasticity of demand for soft drinks. Many discussions of the policy cite an estimated demand elasticity of .79 put forward by Yale University's Rudd Center for Obesity and Food Policy. (Follow this link to the Center's policy brief on the topic.) Closer examination suggests, however, that the research underlying this number is not terribly solid. The .79 estimate comes from a meta-analysis by the Rudd Center's Tatiana Andreyeva and colleagues. The 14 previous elasticity studies they consulted included estimates ranging from 0.13 to 3.18. Revenue estimates put forward by the center assume perfectly elastic supply, so that the tax would be fully passed along to consumers.
A soda tax would produce both revenue for the government and a potential deadweight loss of foregone producer and consumer surplus. However, proponents maintain that like "sin taxes" on alcohol and tobacco, a soda tax would provide offsetting gains in the form of reduced deadweight losses from negative externalities. Potentially, a properly calibrated soda tax would both boost government revenue and raise economic efficiency.
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