Fat tax won’t slim a thing

Last week Hungary became the first country to introduce a comprehensive ‘fat tax’ on foods with high fat, sugar or salt content.  But it won’t make them slimmer or reduce health costs.

Beginning Sept. 1, Hungarians will have to pay a 10 forint (€ 0.37) tax on foods with high fat, sugar and salt content, as well as increased tariffs on soda and alcohol. The expected annual proceeds of €70 million will go toward state health care costs, including those associated with addressing the country’s 18.8 percent obesity rate, which is more than 3 percent higher than the European Union average of 15.5 percent according to a 2010 report by the Organization for Economic Cooperation and Development. In Germany, by comparison, 13.6 percent of adults are obese, with Romania at the bottom of the list with 7.9 percent.

The economic arguments in favour of all sin taxes, including on tobacco and alcohol, are that:

1.      the taxes reduce ‘harmful’ or ‘unhealthy’ consumption, and

2.      the taxes raised offset likely health costs such behaviours incur on others.

Unfortunately neither argument is compelling.

The price elasticity of demand for a sin taxed good will determine the decline in consumption of the apparently harmful product.  If demand is highly elastic, meaning that quantity of the good people choose to consume is very sensitive to price, then a tax may significantly reduce consumption.

However, demand is typically only highly elastic when there are many substitutes available.  For example, demand for petrol is inelastic because there are no (or very few) alternatives, while demand for cornflakes is probably much more elastic because of the wide range of alternative breakfast cereals.

This means that if the tax is effective at reducing the ‘harmful’ taxed consumption, it is promoting consumption of some alternative.  So what alternatives are out there?  The following example is typical of the type of offsetting behaviour I would expect:

Research has shown that when the price of a “sinful” good increases, consumers often substitute an equally “bad” good in its place. For example, two studies found that teen marijuana consumption increased when states raised beer taxes or increased the minimum drinking age. Another study found that smokers in high-tax states are more likely to smoke cigarettes that are longer and higher in tar and nicotine than smokers in low-tax states. Specifically, they discovered that young adults aged 18–24 are much more responsive to tax changes than older smokers. For young smokers, the switch to cigarettes with higher tar and nicotine is so large that tax hikes actually increase average daily tar and nicotine consumption.

One could easily imagine how similar substitutions would occur with soft drinks, perhaps leading to increased consumption of alcohol (forget the lemonade, give me a beer).

The second argument in favour of sin taxes is that people who consume in an ‘unhealthy’ manner cause a greater financial burden on society by forcing others to pay for medical treatment of conditions stemming from such consumption, especially in most first-world countries with government-funded healthcare, and should be taxed extra to pay for the costs of their treatment.

This is absurd for two reasons.

First, the logical extension is that government should also tax other risk-taking behaviour, such as driving or lying on the couch all day, while subsidising healthy foods and ‘acceptable’ behaviours with the purpose of decreasing the financial burden of health care.  It is the greatest excuse for government fund raising discovered.

A line needs to be drawn between medical intervention and freedom of choice. I have noted before that when Queensland added fluoride to the drinking water, that line was crossed – akin administering medical treatments without consent.  Why not anti-depressants in the water supply?

The second reason to oppose sin taxes is that health care costs are not typically reduced by living a ‘healthy’ life but are likely to be increased. This is best explained as follows (my emphasis):

It’s easiest to think of smoking as bringing forward a whole lot of end of life costs. Smokers die earlier than non-smokers. We know that. And the costs to the health budget of somebody who is dying are rather higher than the costs of somebody who is healthy. But everybody dies sometime and most of us will incur end of life costs that will be paid for by the public health system.

Suppose that a smoker will die at age 65 and a non-smoker will die at 75. Comparing 65 year old smokers to 65 year old non-smokers and calling the difference the cost of smoking then rather biases upwards the measured costs of smoking; we ought to be comparing the health costs of a smoker dying at age 65 with the health costs of a non-smoker dying at age 75. And, perversely, the deadlier cigarettes are, the greater will be this bias. The younger smokers are when they die of smoking-related illnesses, the greater will be the measured cost difference between smokers and non-smokers because a smaller proportion of comparable non-smokers would be incurring end of life costs.

The figures assume that in the absence of smoking, smokers would never have imposed end of life costs on the health system. But for their smoking, all smokers would have died of a sudden, and cheap, heart attack and would only have had average health costs up to that point. That’s clearly nonsense.

As a final note, the amazing gap between academic understanding, public perception and political ramblings, suggest that taxes on tobacco, alcohol and fatty foods are more about raising revenue than reducing society wide health care costs. The counterintuitive nature these results makes them easy to bury away from policy discussions, allowing the public debate to remain at a superficial level.

Comments

  1. high demand for “chop chop” when cigarettes are expensive as well.

    As another tobacco example of looney government intervention, the government stopped (legal) tobacco growing here and paid farmers lucrative amounts to cease growing and switch to alternative crops. The upshot is that all tobacco now is imported (CAD!!). If a product is legal why would you ban growing it and instead import it. Maybe they are smoking a different kind of cigarette in Canberra??

    I have noted before that when Queensland added fluoride to the drinking water, that line was crossed – akin administering medical treatments without consent.

    You’ve seen Dr Strangelove, right?

    • Ironically heroin is illegal but we grow poppies here.

      Maybe thats the reason for afganistan – take out the competition ?

    • Tobacco was actually subsidised quite heavily in its last few years grown in australia, there was a 15% local content requirement on all tobacco products sold.

      The closure of the industry (particularly in victoria) was badly handled. (victorian growers were induced to buy out machinary from Qld growers, before their own region was closed).

  2. I can’t help but disagree, especially on your first point.

    Yes there will be some substitution away from the taxed item to alternatives that are perhaps also harmful, but that does not mean that everyone who sinned substitutes away to a bad alternative.

    There will be some who continue to sin, some who consume a good alternative, and some who consume a bad alternative. It’s only the third category where the outcome is potentially worse, but I find it unlikely that it would outweigh the other two, and the overall outcome will be worse.

    What are junk food eaters going to substitute towards as a replacement? Perhaps smoking or drinking, but the numbers that do that wouldn’t be large, you still need to eat. I’d imagine in this circumstance most would continue to consume junk food, with a small proportion substitute their eating to healthier alternatives.

    As for it not reducing health costs, well you’re right, most health costs arise from people that are living rather than people that are dead. but the longer people live, the more taxes they are going to pay (if they’re working).

    Not all health concerns result in death, but it does not mean that they still aren’t costly. Someone who leads a healthy lifestyle is far less likely to have medical concerns throughout their life than someone that doesn’t.

    • Even not working, all people are still paying taxes. Only income tax is less for not working retirees. They continue to consume and support general demand for many goods and services. And some people are still criminal, although we have laws and jails. This argument about taxing is not reasonable.

      It would be better if the basic goods are not taxed at all, than this would signal good policy intentions. If we are homo economicus, we have to be regulated via taxes rather than other direct government interventions.

      The problem is the government is addicted to high revenue and high spending as well as some corporations are addicted to high profit margins. No one cares about people’s health.

  3. I disagree as well.

    Its a matter of risk. Some activities have a well understood risk profile. We have a socialised healthcare system and the outcome of those risks is shifted onto the broader community. Driving carries with it a risk, but most people drive their entire lives without being killed by it. Driving is also something that is an integral part of people’s ability to be productive.

    “A line needs to be drawn between medical intervention and freedom of choice.”

    Yes it does. But its a very subjective notion of where to put it and something to be discussed issue by issue.

    I am perfectly happy to have fluoride in my water and I’d like to know if anyone has been detrimentally affected by this. Certainly, the evidence of reduced cost to society from improved dental hygiene is out there. Is putting traffic lights at a dangerous intersection interventionist and an affront to freedom of choice for people who would rather make their own decisions about how to approach the intersection?

    On your other point, each person is an investment of societies resources. If they die younger then you get less productivity out of them. In modelling I have seen on the cost of smoking to society, the productivity losses drastically outweigh the medical costs, and this is just during a smokers lifetime. It doesn’t even include the years lost by early death.

    I think increasing taxes on unhealthy foods will have a positive effect. Cost is not the only driver behind unhealthy eating choices so it won’t work for everyone, but still its a place to start.

    • Passenger and Nogen, the evidence is pretty clear that most health costs are borne in the final year of one’s life, regardless of their ‘healthiness’ throughout that life.

      The evidence is also very clear that early deaths reduce the burden on public health care because people live for fewer years after they stop contributing their taxes.

      http://ckmurray.blogspot.com/2011/06/smoking-decreases-health-costs-to.html

      Without smokers and obesity our public health costs would be higher.

      “the productivity losses drastically outweigh the medical costs”
      Some of this research assumes that ALL smokers have the same productivity losses as the most severe cases. What proportion of smokers do you know who have demonstrable losses in productivity? Very few I would have thought.

      The question about drawing the line in medical intervention seems very clear to me. If we want government medical treatment, it must be opt in (like it currently is at the hospital – you can’t be forced to stay and accept a treatment). Fluoride is opt out. An opt in option would be to provide free fluoride tablets at hospitals and health clinics for thos who want them. You also wouldn’t be watering the garden with flouride either.

      I have no problem with these types of subsidies on health grounds, just as I believe that publicly provided health care is a net positive for society.

      • “Passenger and Nogen, the evidence is pretty clear that most health costs are borne in the final year of one’s life, regardless of their ‘healthiness’ throughout that life.”

        Haven’t looked at it but this seems reasonable.

        “The evidence is also very clear that early deaths reduce the burden on public health care because people live for fewer years after they stop contributing their taxes.”

        Yes, early death will reduce public health costs overall. So I concur that public expenditure is reduced on account of early death. On the productivity side, I would agree that some of the lost time is not part of the “PAYG income taxable” life of a person. If you are talking about prolonging someone’s life so they can sit in a nursing home for an extra ten years then obviously there isn’t much point. But a person pays taxes and more generally contributes to society in a lot of other ways and not all of those are easily measured in dollars. A person who is healthier is more likely to work for more years. They are more likely to be more active in their retirement, spend more, be involved with community groups, volunteer etc.

        “What proportion of smokers do you know who have demonstrable losses in productivity?”

        I can’t recall the exact factors used in the studies, off the top of my head they had included an increased number of sick days used by smokers and lost productivity caused by smokos (there was more than this but it escapes me at the moment).

        “The question about drawing the line in medical intervention seems very clear to me. If we want government medical treatment, it must be opt in (like it currently is at the hospital – you can’t be forced to stay and accept a treatment). Fluoride is opt out. An opt in option would be to provide free fluoride tablets at hospitals and health clinics for thos who want them. You also wouldn’t be watering the garden with flouride either.”

        Is it a medical treatment to purify water? Why do people still use water filters or buy bottled water? Does the government have an obligation to provide us with 100% pure H20? Providing free tablets wouldn’t work because of the human factor – the supply and delivery mechanism is too involved for the people it helps the most.

        The inefficiency of watering the garden with fluorised water is a moot point. Cost per effect is the critical thing and wastage can be perfectly acceptable. What is the cost saved in reduced dental bills vs the cost of fluoride put in the water. Not all benefits can be easily measured in dollar values either.

        • Isn’t the argument in support that it prevents tooth decay? Isn’t that a medication? These guys think it is
          http://www.nlm.nih.gov/medlineplus/druginfo/meds/a682727.html
          Although the QLD Dept. of Health takes a different approach

          Is water fluoridation mass medication?

          Water fluoridation is not mass medication. Fluoridation is simply the
          adjustment of the level of fluoride in the water to give a major public health
          benefit. It can be compared, in a public health sense, to chlorination of water supplies to ensure drinking water quality, universal immunisation to prevent the transmission of communicable diseases, the addition of vitamin D to margarine for the maintenance of healthy bones, and the addition of folate to cereals to reduce birth defects.

          http://www.health.qld.gov.au/oralhealth/documents/30265.pdf

          ? By that logic optional publicly funded immunisation is the same as a company adding vitamins to processed foods.

          However, dental isn’t covered in the public health system, so maybe its not a medication 😉 Which makes the cost argument a little strange.

          • Sanitation prevents disease. Is sanitation a medical treatment?

            There is moisturiser in my shaving cream that reduces shaving rash and other stuff that reduces in grown hairs. Is that medication?

            For me, the whole point of whether something is or isn’t medication isn’t important. I’m not going to adopt an ideological position over it (government should/shouldn’t be allowed to do XYZ). Otherwise the argument is “Assertion: Compulsory medication is bad. Is XYZ compulsory medication?” You have to prove the assertion (which you can’t because it boils down to philosophy and ideology) and then have an argument about semantics and definitions to which is likely to be subjective at best.

            It boils down to does it provide a net benefit to society? What are the downsides? Is that equation one-sided enough to allow broad scale action?

            Unlike QLD health, I do recognise a difference between putting something in a discretionary food article and putting something in the water supply. The stakes are obviously much higher when you do that. Is there an opt-out for the tiny opposed minority (filters/bottled water)?

          • Good points again Nogen. Yes it is a matter of semantics at times.

            The opt-out option is about $600 for a water filter that reduces fluoride levels + about $100/year for filter replacement. It’s not an extreme cost (although compared to the cost of the same volume of water it is). I don’t have one.