Ice Cream Tax Finishes Melting Finnish Business, Mexico Considers Soda Tax
August 30, 2013
The Wall Street Journal reports that Finland’s 2011 tax on sugary goods is driving ice cream trucks out of business, and that Mexico is considering implementing its own sugar and sweets tax under the auspices of curbing obesity. In 2014, Finland will add more products, like cookies and jam, to its list of taxed goods. These taxes are particularly notable because Mexico has the second highest per capita soda consumption in the world, while Finland has among the highest rates of ice cream consumption.
We have written about similar sugar and snack taxes in U.S. states, even giving testimony before the Vermont House of Representatives. These taxes are fraught with problems: the connection between taxed goods and obesity is not always straightforward, the definition of taxed goods can be contentious and arbitrary, the effects of these taxes are generally regressive, and they needlessly complicate and distort the tax code.
The case of Finland is particularly revealing, as it demonstrates the powerful effects that taxes can have. The 0.75 euro per kilo tax rate, or $0.45 per pound, translates to about $0.72 per quart of ice cream. If a similar tax were levied in the United States, it could be up to a 30 or 40 percent tax rate. Rates that high can obviously have significant effects on consumption behavior: hence why a country with one of the biggest ice cream demands in the world has ice cream providers going out of business.
Mexico’s current deliberations about a soda tax echo debates in the United States about the issue. Advocates cite Mexico’s rising obesity rate and high soda consumption, and thus call for taxes on soda as a way of reducing consumption, and thereby obesity.
However, as the Wall Street Journal reports, Mexico is home to huge soda bottling and production operations. Consumption may fall, and with it business for the companies that employ thousands of Mexican workers. Meanwhile, as cited above, research suggests that the obesity-curbing effects of excise taxes are limited. People who drink lots of soda may consume less soda, but substitute more calories into their diet from other sources instead.
These kinds of “sin taxes” where society picks one group to punish with a special moralizing tax create distortionary tax codes and inflict burdens on largely lower-income consumers.