Reducing Obesity by Taxing Soft Drinks: Tax Salience and Firms’ Strategic Responses

Abstract

In the fight against obesity, governments have pursued various policies to increase soda prices in the hope of discouraging consumption. Previous studies examining the efficacy of taxing sodas have generalized sales taxes to other taxes and assumed that imposing a tax is as salient as imposing a direct price hike. In this research, the authors recognize that most consumers do not pay much attention to how taxes differ in application. Thus, the authors disassociate the effects of sales taxes from the effects of direct price increases on soda demand, estimate pass-through rates of excise taxes in the soda market, and compare the efficacy of the two types of tax at three tax levels. They find that, for all three tax levels, imposing an excise tax on sodas drives much steeper declines in overall demand than a sales tax does. The findings suggest that failing to distinguish between tax types leads to a biased estimation of the effect of taxes on soda consumption. This research provides important implications to help policy makers adopt the most applicable tax instrument to battle obesity.