Note: This post is a special year-end issue in my blog series, reflecting on recent policy discussions from a health economics conference in Nepal.
“The policy logic behind taxing High-Sugar, Salt, and Fatty (HFSS) foods is compelling and urgent: curb consumption, expand fiscal space, and fund health to fight non-communicable diseases (NCDs).” The public health framing was clear, and the intent, unquestionably serious.
Yet, as discussions unfolded, I was struck by a gap. The debate often treated the tax as a self-contained instrument—a simple lever in a complex machine—as if pulling it would predictably shift consumption and revenue. There was less engagement with the intricate economic mechanics transmitting that pull: the conditions under which higher prices actually deter people, how revenue navigates informal markets and political pressures, and when funds reliably reach health systems.
This gap matters because taxes are not merely a health signal; they are economic shocks that ripple through incentives, substitutions, and institutions—especially in developing economies like Nepal. Without examining these pathways, policy debate risks leaning more toward advocacy than analysis.
This blog takes that discomfort as a starting point. I will not reargue the principle but dissect the mechanism. Under what specific economic and institutional conditions can such a tax genuinely create fiscal space for health in Nepal? Answering it requires moving beyond public health framing and engaging seriously with economic causality, development context, and policy design. My aim is to bridge public health interest with core economic reasoning, clarifying what must be true for this policy to work and which assumptions deserve our sharpest scrutiny.
From Public Health Framing to Economic Causality
At its simplest, the policy logic for taxing HFSS foods is a clean causal chain: a tax raises prices, higher prices reduce consumption, and the resulting revenue expands fiscal space for health. The appeal lies in its apparent inevitability—once the tax is imposed, the outcomes seem guaranteed.
Development economists tend to approach this chain with more caution. Each link represents not a fact, but a contingent mechanism whose function depends on local conditions. The goal isn’t wrong, but the path to it is uncertain.
A tax reduces consumption only if people respond to higher prices. That response is governed by price elasticity—a sensitivity knob, not an on–off switch. For consumers with cheap substitutes, informal alternatives, or tight budgets, all of which are common in Nepal, turning the price knob may barely change consumption, blunting the intended health gains.
Even when a tax does generate revenue, its scale is not automatic. Tax buoyancy—the extent to which revenue actually grows in response to higher tax rates—is shaped by evasion, substitution, and administrative reach. A tax that looks promising on paper can disappoint once it encounters a dominant informal market.
Finally, fiscal space is more than revenue; it is a political commitment. Earmarking funds for health may appear to be a technical solution, but its realization depends on whether governments can—and will—shield those resources from competing political demands.
Seen this way, the HFSS tax is less a linear lever and more a system of interconnected mechanisms. Understanding its true effect requires tracing causality through each link—a shift from confident claims to careful analysis, and where serious economic reasoning must begin.
The Development Economics Lens: Beyond Revenue
To see why context matters, imagine a small roadside shop in Birgunj or Janakpur. Sugary drinks, packaged snacks, and fried foods sit alongside homemade alternatives and locally produced substitutes. When a tax raises the price of a branded product, the response is unlikely to be uniform. Some consumers may buy less. Others may switch. Vendors may adapt their offerings. The policy shock travels through a dense web of informal transactions, household budgets, and market workarounds. This is where development economics begins to matter.
One central concern is equity. Uniform consumption taxes tend to be regressive because lower-income households spend a larger share of their income on basic consumption, including cheap calories. Whether an HFSS tax ultimately harms or benefits poorer households depends not just on who pays the tax, but on how consumption responds. If poorer households are less able to substitute away—because healthy alternatives are limited or diets rely heavily on inexpensive, calorie-dense foods—the tax risks reducing welfare without delivering meaningful health gains. The relevant question is therefore the net welfare effect, not tax incidence alone.
A second challenge lies in substitution within informal markets. When taxed products become more expensive, consumers do not disappear; they search. In Nepal, that search may lead to untaxed local snacks, homemade sugary drinks, or products entering through informal cross-border trade with India. Such leakage can dilute both health objectives and revenue expectations. From the outside, consumption appears to fall. In reality, it may simply reappear in forms that are harder to regulate, measure, or tax.
Finally, there is the issue of evasion and administrative limits. Product misclassification, underreporting, and selective enforcement are not anomalies in low-capacity tax systems; they are predictable responses. Vendors and distributors often adapt faster than regulations do. As evasion rises, the tax base shrinks, and the gap between projected and actual revenue widens.
Taken together, these challenges do not imply that HFSS taxes cannot work. They imply that success in Nepal hinges less on intent and more on design, institutional capacity, and complementary policies. Ignoring these mechanisms risks mistaking aspiration for outcome.
What We Need to Know: Five Research Questions with Purpose
If the effectiveness of an HFSS tax hinges on specific behavioral and institutional responses, then the research agenda must target those mechanisms directly. What Nepal needs is not imported parameters, but evidence grounded in local conditions—answers to a small set of pivotal research questions.
1. The sensitivity knobs: Who bends and who breaks?
The first question concerns behavioral response: how sensitive is consumption of different HFSS items to price changes, and does that sensitivity vary by income? This is the central economic mechanism behind the tax. If lower-income households are more price-responsive, consumption may fall sharply among those most at risk, delivering health gains but limiting revenue growth. If they are less able to adjust, the tax risks being both regressive and ineffective. Estimating price and cross-price elasticities by income group also reveals what people substitute toward—water, milk, or untaxed high-fat snacks—distinguishing genuine health improvements from mere reshuffling of calories.
2. The leaky bucket: How much revenue sips away?
The second question asks how much of the tax base survives contact with informality. What share of potential revenue is lost to evasion, underreporting, or informal cross-border trade? In a country with an open border and a large informal food sector, this is a core determinant of fiscal space. It shifts the debate from theoretical revenue potential to the collectable resources that can actually fund health programs, requiring methods that move beyond simple before–after comparisons.
3. The scales of justice: Does health gain outweigh the tax cost?
A third question focuses on welfare: what is the net effect of the tax on the poorest households? Development economics demands more than incidence analysis. It requires weighing the financial burden of higher prices against the monetized value of avoided disease. Without a credible counterfactual—what health and spending trajectories would have looked like in the absence of the tax—claims about progressivity or harm remain conjecture.
4. The investment map: Where does the revenue yield the highest return?
The fourth question concerns policy design. What earmarking or subsidy strategy best converts tax revenue into welfare gains? Should funds prioritize NCD services, or subsidize healthy staples in a context where undernutrition and overnutrition coexist? This is an empirical question about net benefit, not moral preference.
5. The administrative bottleneck: Is the design too clever to implement?
Finally, there is a feasibility question: does the benefit of a complex, multi-nutrient tax outweigh the constraints of administrative capacity? Effectiveness ultimately depends on whether Nepal’s institutions can implement nutrient profiling accurately, or whether a simpler tax design would perform better in practice.
Answering these questions shifts the debate from whether HFSS taxes are desirable to whether, how, and under what conditions they can work in Nepal.
Conclusion
The case for addressing NCDs through fiscal policy is serious, and the motivation behind taxing HFSS foods is easy to understand. But good intentions do not substitute for good economics. In Nepal, where informal markets, income constraints, and administrative limits shape how policies play out, the effects of such a tax cannot be assumed; they must be traced.
Seen through a development economics lens, the HFSS tax is not a single intervention but a sequence of contingent mechanisms—behavioral responses, market adaptations, revenue realization, and political allocation. Whether it improves health, expands fiscal space, or unintentionally burdens the poor depends on how each of these mechanisms operates in practice.
For researchers, this implies a responsibility to move beyond descriptive evaluations and embrace causal thinking that is sensitive to context, heterogeneity, and counterfactuals. For policymakers, the challenge is equally demanding. The relevant question is not simply whether the tax can raise revenue, but at what social cost, with what administrative burden, and with what credible commitment to health spending that benefits the most vulnerable.
If the debate shifts from slogans to design, from intentions to mechanisms, HFSS taxation can become not just a policy ambition, but a policy that works.