Thursday, December 24, 2015

Should There Be a Tax on Unhealthy Foods and Drinks?

I'm not about to have Christmas dinner, but I do know that Christmas dinners, and certainly those in an American context, can be some of the largest and elegant family meals out there. Christmas meals can vary based on family tradition and/or country, but there is typically some sort of meat dish, such as a Christmas ham, roast, or gamey bird. There is also some sweet dessert, such as Christmas pudding, pie, or cookies. Mashed potatoes or dinner rolls spread with butter also make it to the Christmas table. For many, it sounds delectable. For others, the overconsumption of excessively fatty and sugary foods could be viewed as a manifestation of the obesity problem in this country. What would happen if being able to have such a Christmas meal were a larger financial burden? What would happen if that were not just for Christmas, but people couldn't eat fatty or sugary foods year-round? What would happen if the culprit were not a downright ban on foods, but rather due to a food tax that was high enough to cause a health nut's dream to come true?

These were the sort of questions I was asking myself as I was reading a recent research report from the Left-leaning Urban Institute entitled Should we tax unhealthy foods and drinks? The report recommends a tax on unhealthy foods to deal with the economic and social costs surrounding obesity since a moderate soda tax could, according to their model, reduce obesity 1 to 4 percentage points (Marron et al., 2015, p. 2). As the Urban Institute report points out, obesity costs the U.S. healthcare system up to $300 billion per annum (ibid., p. 5). The Brookings Institution illustrated the economic costs of obesity a few years back. Could this type of tax help deal with our obesity issues?

I'm not thrilled prima facie about more taxes not only because I think tax rates are already too high, but also because much like a cigarette tax, this comes off more as a sin tax than it does a Pigovian tax. Increased government intervention in the healthcare industry, like we have witnessed with Obamacare, increases the extent to which health issues such as obesity become socialized costs. Nevertheless, there is a huge element punishing the "sinner" with higher tax rates. Even so, such taxes are relatively less objectionable than a downright ban on certain foods. A food tax or fat tax would act as a consumption tax, and on the bright side, consumption taxes are indirect taxes. Indirect taxation notwithstanding, I do have to wonder about effectiveness.

The Urban Institute lists places that have already implemented such taxes, emphasizing that the structure of the tax can play an important role in the tax's success of failure. For instance, Denmark instituted a 16DKK ($2.70USD) tax per kilogram on saturated fats in October 2011. This tax exemplifies the high tax rates for which Denmark is well-known. It is also noteworthy to state that only took about a year before Denmark, the first country to enact a fat tax, repealed it. Why? For one, it wasn't lowering fat consumption. Danes were simply heading over to Germany to stock up on fattier foods. It was also a bureaucratic nightmare for Danish food producers and distributors. It also attributed to inflation in Denmark. Overall, the effects of such a tax were decidedly negative for Denmark (Snowdon, 2013). Perhaps people have learned from the Danish debacle. Other countries that have implemented such taxes are Hungary, France, and Mexico. At least for Mexico, the tax does not seem to have accomplished anything significant. Conversely, some laud the Hungarian food tax as a success.

If one were to advocate for such a tax like Urban Institute does, then it depends on what is taxed, at what rate it is taxed, and the consequences of said tax (e.g., consumer behavior, product substitution, improved healthcare). In the Urban Institute report, the author points out that the type of food affects sensitivity to prices, what is known in economic jargon as price elasticity of demand. Soda has an elasticity of 0.9, which is higher than the elasticity [of 0.5] of other foods (e.g., fast food, produce). This elasticity could help explain why soda taxes are more popular than other food taxes, and why most of the countries that have implemented such taxes go after such sugary products.

Aside from collecting government revenue, the main function of a tax is to disincentivize behavior, which is probably why the Urban Institute recommends a food tax. The Urban Institute is astute enough to realize that taxes are most effective when there is a tight relationship between that which is being taxed and the negative externality. For instance, we know that cigarettes are the primary cause of smoking, and thus there is strong linkage between a cigarette tax and cigarettes. Dealing with obesity is not that simple. Obesity has multiple causes. Additionally, people have different reactions to food intakes and the effects of obesity, and going after fat or sugar with such a broad stroke is counterproductive and hubristic. Perhaps this is a reason why the Urban Institute recommends going after sugar dosages instead of a straight-up tax on sugary goods (Marron et al., p. 14). Furthermore, much like the Cato Institute specifies, there is another unintended consequence of a food tax or soda tax: regressivity. A food tax or soda tax wold hit the poor much more than the rich because the poor would pay a higher percentage of their income to food. A food tax would be less popular than a sin tax on cigarettes. Why? Not everyone smokes, but everyone eats food. It would hit lower-income families harder, which is certainly a drawback to such a tax (Marron et al., p. 2). Since people need to eat to live, the substitution effect is all the more serious of an issue than it would be with cigarettes (Fletcher et al., 2013).

The question of whether poor dietary decisions are a negative externality notwithstanding, we have to ask ourselves what to do with a lack of evidence that such taxation works, especially in light of its unfairness and inability to counter the substitution effect. A 2014 article from the Journal of Public Health (Cornelsen et al, 2014) summarizes it well by pointing out that the taxes might reduce certain consumption by a small amount, but fails to take in account food substitutions. As even the Urban Institute admits, there is a lack of data in determining the more indirect effects that could undermine the overall success of such taxes (Marron et al., p. 3). Food taxes, fat taxes, and soda taxes are not going away anytime soon. While we wait on the data regarding the overall effectiveness on the taxes, might I suggest removing subsidies for sugar, national school lunches, and agricultural protectionism via the Farm Bill that allows such ingredients as fructose corn syrup to flourish? We can correct the government policies promoting obesity, thereby making the American government less hypocritical if/when it attempts to lower obesity rates with these consumption taxes. As the Urban Institute study showed, obesity rates could only experience a reduction 1 to 4 percentage points at best, which would only moderately decrease what is currently a 34.9 percent obesity rate in this country. Even a British Medical Journal study showed that for fat taxes to even begin having effect, the taxes would need to be 20 percent, which is hardly an insignificant amount. We cannot count on some overbearing government regulation to do the work. We need to encourage others around us to lose weight, and more importantly, we need to take responsibility for our own health if we don't want obesity to be a cost to the economy, society, or ourselves.