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.