A Fool’s Drink

In June 2016, the Philadelphia City Council passed a 1.5-cents-per-ounce tax on sugar-added and artificially sweetened soft drinks. Effectively, their action added 18 cents to the cost of a can of soda, $1.08 to a six-pack, and $1.02 to a two-liter bottle. In advance of its passage, the City of Brotherly Love’s Democratic Mayor, Jim Kenney, sold the council on the idea by informing them that he planned to spend most of the estimated $90 million in new tax revenues to pay for pre-kindergarten, community schools and recreation centers. In certain quarters, this newfound reservoir of funding drew praises. In other quarters, however, the tax had its detractors.

In a January 6, 2017 Fox News article entitled Philadelphia Residents Up in Arms over Soda Tax Hit, David McCorkle, CEO of the Pennsylvania Food Merchants Association, predicted that it would cause “Philadelphians to shop outside the city.” He further reasoned that “sales would decline not only in the beverage category, but in all categories.”

Bingo! As the business community anticipated, the tax revenue never materialized. In fact, according to Bloomberg News, some soda sellers are claiming that sales have dropped by as much as 50 percent. At Brown’s Superstores, Jeff Brown said “he’s had to cut 5,000 to 6,000 hours of employment per week, the equivalent of about 280 jobs” and reminded that “beverages are the biggest category in a grocery store.”

Surprised? Don’t be. President Ronald Reagan once declared this about business and taxes:

“You can’t tax business. Business doesn’t pay taxes. It collects taxes.”

By his statement, the fortieth president revealed what every wise economist should know. That is, every tax paid by business entities are ultimately borne (paid) by their customers. They, after all, are the ones who purchase the goods and services produced by business firms. While Apple Corporation remits tax payments to federal and state taxing authorities, they wouldn’t be able to pay a single cent if its customers weren’t purchasing their MacBooks and iPhones. Not one red cent! Of course, the same goes for any business. Without customers consuming the products they produce and paying the prices they charge, there is no revenue available to “transfer” to government coffers. Given all of this, higher taxes placed upon a business firm’s products will generally push up prices similar to the way a labor contract scheduled to hike worker wages would.

And in the end, those higher prices will be subject to the Law of Demand, which reminds:

“All else being equal, as the price of a product increases (↑), quantity demanded falls (↓); likewise, as the price of a product decreases (↓), quantity demanded increases (↑).”

Beneath the theory, the Law declares that with regard to consumers, a rationality is at work. When faced with higher prices, consumers will often demand less of the thing being offered for sale. In regard to soda pop, consumers in Philadelphia behaved as I expected. When faced with rising prices brought about by higher taxes, they chose to purchase less (at least within the taxing authority of Philadelphia). And by purchasing less, expected tax revenues declined. As such, workers who formerly relied upon incomes from soda pop sales now find themselves in an unemployment line.

In regard to taxes, the great Henry Hazlitt once remarked:

“All subsidy measures, all schemes to redistribute income or to force Peter to support Paul, are one-eyed as well as shortsighted. They get their immediate appeal by focusing attention on the alleged needs of some particular group of intended beneficiaries. But the inevitable victims – those who are going to be asked to pay for the new handout in increased taxes (which directly or indirectly means almost everybody else) – are left out of account. Only one-half of the problem has been seen. The cost of the proposed solution has been overlooked.”

Despite the evidence, there are certain among us willing to raise taxes to “right” what they believe to be “wrong” about society. By following their incorrect instincts, they will continue to pour upon our world a fool’s drink.