The Orwellian Efficiency of a "Being Fat" Tax

(Digital Vision)

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.


Krista

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...

rationalrevolution

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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BigFire

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

TC

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.

stauffen

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)...

Steve

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?

Emily

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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rationalrevolution

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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JohnS

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

Ahmed Zghari

Fat chance it will work.

Mike

The US subsidizes sugar, but not gym memberships. I don't see a fat tax coming any time soon.

rationalrevolution

Here is a simple question:

Should people who engage in risky behavior pay more for health insurance?

I think almost everyone (except maybe people who engage in risky behavior) would agree that health insurance SHOULD price in behavioral risks. In other words, people who go sky diving and bungee jumping on a regular basis SHOULD pay more for health insurance than people who don't, all else being equal.

Likewise, someone who eats a lot of junk food SHOULD pay more for health insurance (all else being equal) than someone who eats healthy food.

In fact if such people don't pay more for health insurance then they are, in aggregate, freeloading off of people who have healthier and lower risk lifestyles.

Who disagrees with this?

But here is the thing, there is no way to actually IMPLEMENT such a system without significant invasion of privacy. This is the beauty of applying targeted consumption taxes. They can achieve this same effect without any invasion of privacy, and, to top it all off, this works exceptionally well when coupled with a single payer health care system. With a single payer health care system if roughly 1/3 of the revenue to pay for the system were raised from targeted consumption taxes this would have the dual benefit of pricing in risk up front to help people make more informed consumption choices, hopefully thus reducing the demand for health care associated, and it would put the burden of paying for health care more squarely on the people whose behaviors are responsible for the costs.

Indeed I agree that such a system is the only ethical system we could have. Right now the heaviest burden for health care costs in America goes to those who have "lost the genetic lottery" so to speak because those are the people who have something that can be used to price risks, namely via "existing conditions", so people are paying more for insurance for things that are totally out of their control, while behaviors that are under people's control have no direct impact on insurance prices, primarily because there is no reasonable way to quantify said behaviors, which is the beauty of consumption taxes, they largely do this, without the intrusiveness.

For more see my Single Payer health care proposal in the article below:

http://www.rationalrevolution.net/articles/restore_america.htm

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Geoff

"Bad calories" (from eating out) are more expensive than good ones (from buying fresh ingredients). Since one of the best indicators of poverty is being overweight/obese, I don't think modern American "poverty" is quite the same as it used to be.

The best solution is to 1) let people eat as they will; and 2) let everyone pay for their own medical care and/or insurance. Beyond the moral, we only become concerned for other people's health when we are all forced to pay for their resulting health problems.

Ken

This just shows that economic disparity is the root of many social ills. The problem is inequality of wages and pay. Extreme capitalism (meaning without a moral compass) is the blame.

Skip

Why does this have to be a tax? Build it into insurance premiums instead. Then people who engage in the risky behavior of being overweight pay directly into the coffers of those who end up paying for the resulting heart attacks, diabetes, and other assorted health issues.

Oh, never mind, I know why...because our society refuses to allow people to reap the consequences of their actions. The insurance premium approach only works if you're willing to allow people who did *not* buy the insurance to end up suffering the consequences.

Or alternatively, everyone needs to be forced to buy insurance...which is effectively then just another tax.

rationalrevolution

Just think about what you said, there is no practical way to do it. That's the point I've made about why a tax like this makes sense, especially if combined with a single payer model.

I think we can agree that people who engage in risky behavior should pay more for insurance, and eating (in the broader sense) "junk food" falls into that category of "risky behavior", but in order for private insurance companies to be able to charge for this they would have to track everything that every individual purchased and then tie their purchases into a tracking system that would rate their premium based on their purchasing habits, which I think we can all agree is a heck of a lot more invasive and "Orwellian" than applying a sales tax that goes into a general fund to pay for health care and doesn't need to track individuals.

Its a perfect case demonstrating where taxation and government systems can advance individual responsibility (pricing in the costs of risk) while protecting privacy in ways that private systems would never be able to do.

A similar case can be made for public roads vs private tolls roads, where actually making people pay tolls would end up requiring tracking devices on everyone car if all roads were to in fact be private toll roads without having a toll booth on every corner. And no doubt the companies tracking everyone for tolls would warehouse and resell the data to data miners, etc.

Just face it, "privatizing" everything is a horrible idea from a privacy perspective...

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Anthony DiSante

The other huge problem with this idea is that the government-medical complex has been so wrong for so many years about what kinds of food are, in fact, healthy or unhealthy. And the subject of this post is a prime example. Saturated fat is natural and is the most healthy kind of fat you can consume; even if you believe in the nonsense of cholesterol levels having anything to do with health, you'd still prefer saturated fat because it raises HDL, lowers triglycerides, and shifts LDL from the small dense atherogenic profile to the large fluffy healthy profile. By contrast, polyunsaturated fats from industrial seed oils (i.e. vegetable oils) that the government tells us to eat more of are loaded with omega-6 fatty acids, which are pro-inflammatory and prone to oxidative damage, both of which lead to heart disease.

So the bottom line is that the government, as usual, is actually making the problem *worse* when it interferes in people's lives to "correct" a problem.

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Ben D

Wouldn't it be easier, to just allow insurance companies to charge fat people more? Isn't that a form of fat tax?

James

First, it seems that there are a number of challengeable assumptions in this piece. For instance, that a fat tax is regressive because fat-laden junk food is cheaper and more accessible to poor people than fruits & vegetables. A bit of price comparison shopping at your local grocery should settle the price question, while accessibility is at least in part a function of demand. And then there's the "genetic lottery" excuse...

It occurs to me that there's a commonality between obesity and poverty, and people's reaction to suggestions to alleviate the same. You can show people reams of evidence that learning marketable skills and fiscal prudences is a reliable path out of poverty, just as you can show them evidence that a reasonable diet & an active lifestyle will (almost always) prevent obesity, but they will still want government handouts and magic painless diet pills, and hate you for telling them the facts.

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DRPECON

Obesity is a life threatening Disease! The AMA has established that people suffering from obesity should be treated with the same degree of care and respect as patients suffering from other life threatening diseases i.e., Cancer, HIV-AIDs, Alchoholism, etc.
Obesity is not a choice! It is an addiction affliction which modern medical science has yet to find a cure.
Clearly, what is really needed is a "Being a Fat Cat Tax"! Redistributing income and wealth from the Really Fat Cats to the search for the Cure for Life Threatening Diseases would be more efficient!