The Orwellian Efficiency of a “Being Fat” Tax

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The Danish policymakers who implemented the world’s first “fat tax” last week are remarkable not for their directness in addressing the growing Western challenge of obesity, but for their indifference to the plight of the poor, their deference to political correctness at the cost of economic efficiency, and their willingness to punish certain segments of society.

The Danes may have been the first, but headlines throughout the western world assessed the likelihood of other countries to follow, including this one. A fat tax in the U.S. (or the U.K. for that matter) would add to the growing thicket of regulations across local and federal jurisdictions intended to address weight gain and the external costs that obesity imposes on society— both through higher private insurance premiums and ballooning government outlays for the uninsured.

Whether the tax will improve health outcomes is an empirical question that won’t be answered for several years or more. Steep “sin taxes” on cigarettes, combined with anti-smoking campaigns, have achieved reductions in smoking rates. In other contexts, empirical evidence suggests that dramatic price increases are required to induce measurable changes in behavior, let alone health outcomes.

Regardless, there are plenty of other reasons to hope that we stop at importing fat-laden foods from the Danes and leave their fat tax over there.

First, a fat tax is regressive. That the surfeit of cheap, nutritionally bankrupt calories principally imperils the poor is a popular refrain among health and nutrition advocates. Low-income households are more likely than wealthy cohorts to eat fatty fast food and to have less access to fresh, healthy food. A fat tax, then, hits the poor harder than it does the rich, who can better afford the “good” unsaturated fats and avoid the “bad” saturated and trans fats. Given that the U.S. economy is still struggling in the worst economic downturn since the Great Depression, now would seem an inopportune time to impose an additional burden on the poor.

Second, a fat tax is inefficient. It achieves incremental improvements in health outcomes at a greater cost than other policies. Like taxes on sodas, candy and chips, and like mandatory calorie labeling laws, a fat tax is an indirect mechanism for reducing obesity-related health care costs. Rather than taxing the outcome that causes the problem directly, as demanded by economic efficiency, it instead taxes an input into the production of health outcomes.

Taxing the input allows substitutions among other inputs in the production function that impose costs and undermine the impact of the tax. For instance, if we tax saturated fats, people may eat less fatty junk food like ice cream, but more sugary food like candy. Or they may reduce consumption of saturated fats but also reduce exercise (as this study from the Journal of Political Economy suggests). Both substitutions make consumers worse off as they deviate from their preferred consumption bundle and potentially yield no benefit to society from reduced obesity costs. Thus, an efficient policy taxes being fat, not eating fat.

Finally, Denmark’s fat tax is poorly targeted. It punishes those who won the genetic lottery and can seemingly eat whatever they want without serious consequence to their health. It also punishes those who, by virtue of their work or their devotion to the treadmill, burn enough calories to afford junk food. The dis-utility borne by these individuals contributes to the costs of the fat tax and yields no benefits to society.

If policymakers were serious about implementing efficient obesity policy, they would have to tax being fat, not eating fat, by charging individuals for each “overweight” pound they’re carrying. It’s an idea so repugnant that even the most heartless economist surely wouldn’t endorse it. In fact, it’s so politically incorrect that perhaps only the folks at Irish airline Ryanair could embrace it. (In 2009, they floated the idea of a passenger-weight-based fee and have also broached such taboo topics in the airline industry as fees for use of airplane lavatories and cheap tickets for standing-room-only airplane cabins.)

Could an efficient “being fat tax” actually be implemented? Sure, so long as you have an affinity for the dystopian Oceania in Orwell’s 1984. We already have federal guidelines for determining obesity, at least to a first approximation. And as part of the looming expansion of government control of the health care industry, one could imagine compelling doctors to report patient pounds to the IRS, which would then have to collect the fat levy annually with income taxes.

Of course, some individuals are genetically predisposed to weight gain. The being fat tax would have to be sensitive to that, perhaps by granting deductions to those who are diagnosed with genetic conditions or other impairments that hinder their capacity to keep the pounds off. Doctors could report such conditions to the IRS, which would use existing audit powers to make sure people aren’t cheating on their taxes. As if the current tax code and looming public healthcare system aren’t complicated enough.

Yes, the being fat tax is dystopian, and we shouldn’t expect to see it promulgated from Washington or London or Paris anytime soon, for a lot of reasons. But it is also an economically efficient response to the rising social costs of obesity and underscores the efficiency losses that we must accept as the price of compassion and political correctness — objectives which typically do not preoccupy economists.

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  1. Krista says:

    What about rewarding behaviors we want to enourage instead of penalizing those we don’t like? So, give people a tax break for maintaining good health or subsidize fruits and veggies so they’re cheaper than junk food…

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    • rationalrevolution says:

      Well this is just a semantic notion. If you say that the tax rate is 10%, but everyone who does X get’s a 2% discount, this is the EXACT same thing as saying that the tax rate is 8% but everyone who does Y has to pay an additional 2%. Its the same thing, but in this case giving people a tax credit for “being healthy” is not only much more difficult, but it would then mean putting an additional tax burden on people specifically for being in bad health, which just has all kinds of BAD written all over it.

      As for subsidizing healthy foods, yeah, but the best way to do this would be to tax unhealthy foods and use those revenues to subsidize the healthy foods. If you are going to subsidize you have to get the revenue from somewhere that you are going to use to subsidize with, so if you didn’t raise that revenue from taxing funk food you would have to raise it somewhere else. And in the end in order to get the same effect you would have to use a bigger subsidy.

      If you “tax the bad” and use that revenue to subsidize “the good” you can apply a 5% tax on the bad and a 5% subsidy to the good get an overall 10% effective differentiation in pricing policy, if all you did was subsidize you would have to apply a 10% subsidy, which means you would just have to raise more money from somewhere to apply it.

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      • NF (@HandNF) says:

        You’re wrong. Financially, a tax rate is the same as a subsidy. However, think about the public opinion. Should I be rewarded for good, or punished for bad?

        It also influences how the public view the government. Are they helping promote healthy eating, or attacking bad eating?

        That stuff will matter if your citizens begin to protest.

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      • Caitlin says:

        We don’t have to tax the “bad” foods and use the money to subsidize the “good” ones. We can just stop subsidizing the “bad” ones (like corn and soybeans) so that “bad” food better relects their actual cost.

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    • David says:

      You would end up subsidizing the already healthy: those who already eat vegetables and work out, rather than targeting the taxation at those for whom a behavior change would benefit society.

      If charging people for inputs is bad, then our remaining option is to charge for results: charging obese people more for obesity related health care.

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    • John B says:

      We don’t need a tax. Just put limits or rewards/punishments on food stamps.

      Go to any store and food stamp recipients carts are full of all the things the rest of us either don’t eat or can’t afford.

      If a food stamp is used for cake, it should cost 2x the store price. If it is used for fruit and vegatables, it would be 1/2 the store price.

      The government (taxpayers) will probably end up saving billions because the fat “poor” won’t buy the fruits and vegatables–even though they can now afford them.

      Hot debate. What do you think? Thumb up 14 Thumb down 11
      • Art says:

        I’d go even further with food stamps. I think it should be run like the WIC program. There should a specific list of things you can and cannot buy with food stamps.

        Nothing pissed me of more when working my part-time grocery store job than to see the food stamp customers buying steak, potatochips, sugared cereals, etc. when I was going to be going home to a bowl ramen soup.

        The WIC program on the other hand is designed to help those that need a helping hand when a new child. That 90$ a month for formula, eggs and orange juice(frozen concentrate) sure helped eased the economic burden of learning to cope with one extra mouth to feed & kept us from either starving or having poor nutrition caused doctor visits for our newborn son.

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  2. BigFire says:

    If they ever implement it here, substitute will be found, and nothing will be change.

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  3. TC says:

    Is there a reason we want people to live longer?
    What with ever-increasing demands on programs like Social Security and Medicaid wouldn’t the ideal outcome for as many people as possible to die before (or soon after) retirement?

    “Healthy” oldsters will require expensive cancer treatment, hip replacements, &c.

    Hot debate. What do you think? Thumb up 21 Thumb down 20
    • James says:

      This only applies if you make a bunch of assumptions, such as

      1) Healthy people would want to retire at an early age;

      2) The net of (productivity – cost of medical treatment) for healthy older people is negative for all years after some given age;

      3) Likewise, the net (productivity – cost of medical treatment) is positive for obese people less than that age.

      Those assumptions are easily shown not to be universally true, since there are healthy older people who remain productive to a fairly advanced age and use little in the way of medical care, and younger people whose medical treatment (even for just obesity-related conditions) costs more than they could reasonably expect to earn in their remaining lifetimes.

      So even if for some reason we wanted to follow your purely economic rationale, it would seem logical to base medical care on the patient’s probable future earning potential.

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  4. stauffen says:

    so what then? this is an argument against taxing anything (petrol, cigarettes,…). Given that the state needs to raise revenues, is it not better to tax “bad” inputs?It certainly looks difficult to me to raise income tax, specially in the US, even though it is not regressive (if properly applied)…

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    • Mary says:

      “is it not better to tax “bad” inputs?”

      No. Doing so puts government in charge of deciding what’s good and bad and that’s a really bad idea.

      In a free country, I decide what’s good and bad as long as I’m not harming another person or their property.

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      • Kate says:

        What is with this way of thinking? “In a free country, I decide what’s good and bad as long as I’m not harming another person or their property.”

        By being obese you are harming other people, I don’t like paying extra taxes for healthcare or extra for insurance rates because everyone can decide what is “good and bad.”

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  5. Steve says:

    Since I blasted you for your previous post on the topic of requiring menus to show the calories on them (http://www.freakonomics.com/2011/08/26/mandating-calorie-counts-has-libertarian-paternalism-gone-too-far/), I’ll give you kudos for this one. This is the kind of post that I come to expect from this blog. This one shows me that the socially preferred way of accomplishing a task is not the most economically efficient way of doing it.

    By the way, I still think the two posts combine to show that, at the margin, posting the calorie counts on menus will direct people to consume less calories. If we can’t change a person’s genetic make-up and we aren’t worried about the people that exercise obsessively, isn’t targeting people at the margin exactly what we should be doing?

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  6. Emily says:

    What I don’t understand is the lazy targeting of the law to focus on saturated fat generically, regardless of its nutritional value. I’m not a nutritionist, but even just as someone with a basic idea of nutrition that seems like an absurd target.

    If you’re hoping to use the tax to change behavior, you should want to incentivize people to eat well, not just eat less saturated fat.

    Make high-quality, nutrition-dense items less expensive than mass-produced, nutrition poor items. Fat is an important part of our diet, and isn’t unto itself the enemy. Calories that carry little or no nutritional value and trans fats that our bodies can’t process are what you should be targeting, rather than treating high-quality, locally-grown, organic meat the same as a candy bar just b/c they both contain Saturated Fat.

    I’m glad it’s got people talking, but this seems like a law written by a politician and bureaucrats rather than a prescription for change devised by experts and then supported by politicians. Might actually work if it was the latter.

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  7. rationalrevolution says:

    Gotta disagree. Well I do agree that “fat” itself may not be the best thing to tax, but the overriding principles are sound. Perhaps it should be expanded in scope, or more properly assessed as a “junk food” tax, but its the right general direction. I’ll address your points:

    #1) First, a fat tax is regressive.

    True, but part of the point here would be to change this fact. Doing this depends on how exactly the overall policy is implemented, and how the revenue is used. If the revenue is used to subsidize healthier food either in general or specifically for the poor, then this problem can be ameliorated. Not only that, but from the perspective of responsibility, if the revenue raised from the tax goes toward health care, then this is simply a way or making people, regardless of their income level, more responsible for their own health care costs in a way that doesn’t lead to bankruptcy from simply having to pay for health care. It ties behavior to costs.

    #2) Second, a fat tax is inefficient.

    Well maybe. We can say that is is perhaps less efficient than other possible alternatives, but none of those other alternatives are in effect either, so its more efficient than doing nothing. I don’t know exactly why they chose to tax “fat” itself, I have no idea if this were a political determination because the sugar lobby was stronger, or if they had some science to advocate for those position or how exactly the choice was made, but I think it should be clear that taking the first step is better than taking no steps at all.

    #3) Finally, Denmark’s fat tax is poorly targeted.

    Speaking as one of those who has won the “genetic lottery”, I don’t agree with this one. While its somewhat true, the converse is also true, not having the tax ALSO punishes those who have won the genetic lottery. Why? Because we still end up paying higher insurance fees or in the case of Denmark higher taxes to pay for the health care of those who lost the genetic lottery, so really we are paying either way. I’d rather pay toward prevention than pay toward dealing with the ramifications. And as you say it is a genetic lottery, so I feel that helping to pay for those who got the short end of the genetic stick is appropriate anyway, after all, none of us have any control over our genetics.

    But here is what you missed out on. Right now the overweight who continue eating lots of unhealthy foods, no matter if they are rich or poor, are freeloading off the rest of us, so without some tax to price the added risk that they are taking on when they eat these foods into the cost of goods, its a system that externalizes the costs of unhealthy food.

    And this is the real issue, right now the costs of unhealthy eating are largely externalized , both to the consumers and the makers of unhealthy foods.

    You also seem to miss the point about manufacturers. Food manufacturers play a large role in this, because as game theory would tell us, one of the impacts of a tax like this should be that it will lead food manufacturers to produce healthier foods with lower fat contents in the first place, so its not simply about changing the behaviors of consumers, its also about changing the behaviors of manufacturers. The important part here, however is to watch out of unintended consequences such as substituting something even less healthy for the fat, etc.

    To me it all goes back to, this helps to price in externalities and it ties behavior to health care costs.

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    • Enter your name... says:

      Actually, I’m not sure that the fat tax is regressive in Denmark.

      I’ve seen good research that says poor Americans eat junk food, but the food pricing structures aren’t the same in Europe. We seem to be assuming that poor Danes have the same behaviors as poor Americans, despite known differences in tax structures and welfare benefits.

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  8. JohnS says:

    Hey, now, don’t dismiss an idea just beacause it’s repugnant. This is Freakonomics!

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