Money

A Soft Drink Tax is an Ineffective Tax

| by The Heartland Institute

Heartland policy advisor, John Skorburg, uses his class teaching notes from Triton College to show why a soft drink or soda pop tax is ineffective.

In micro-economics, economists often use a term called ‘elasticity.’ In short, this term measures the ‘sensitivity’ between a change in price and a change in quantity demanded. So, if a price changes (say the price of a Coca Cola), the “price elasticity of demand” can measure how much the quantity demanded will change as well.

For example, a soft drink is known as a sensitive or elastic good. A lower price will lead to a higher quantity demanded – that’s why soft drink companies see their goods on sale so much at the local supermarket!

But what if a legislator decides to tax this drink and drive UP the price?

Since these beverages are sensitive to a price change, a 10% tax would actually lead to a MORE THAN 10% drop in quantity demanded – and less total revenue to the seller.

Similarly, a 50% tax would lead to more than a 50% drop in sales!! The government thinks it is getting richer, but in fact, everyone is worse off…both buyer and seller.