So Sanders and Clinton are arguing about soda taxes — Clinton for, as a way to raise money for good stuff while discouraging self-destructive behavior, Sanders against, because regressive.Let’s concede the presumption that low income households spend a greater share of their limited income on Coca Cola than high income households but take a look at the incidence of a tax:
A tax incidence is an economic term for the division of a tax burden between buyers and sellers. Tax incidence is related to the price elasticity of supply and demand. When supply is more elastic than demand, the tax burden falls on the buyers. If demand is more elastic than supply, producers will bear the cost of the tax.Of course this is the standard competitive model. Let’s assume such a model with a horizontal supply where the marginal cost of making and selling a bottle of Coke is $1. Imposing a tax equal to $0.20 per bottle will raise the price of a bottle of Coke to $1.20 a bottle with the full incidence on consumers. One could argue, however, that Coca Cola is closer to a monopoly. Let’s imagine in your town that the demand for soda is given by P = a – b(Q), where P = price, Q = quantity, a = 3, and b = 0.01. The competitive market solution puts the price before new tax at $1 and Q = 200. But if Coca Cola has a monopoly, then it raises the price to $2 by reducing Q to 100. In this monopoly model, a $0.20 tax raises the price from $2 to $2.10. In other words, part of the incidence of the soda tax would be borne out of profits rather than simply from consumers. Of course, I’m assuming a simple monopoly model with a linear demand curve. I’ll leave this question of who bears the actual incidence of a soda tax for the capable economists on either Team Bernie or Team Hillary.