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Fat tax

In a recent blog post[i], the London-based New Economics Foundation condemns Jamie Oliver’s patronising comments on the eating habits of the poor.

Whilst promoting his next multi-million pound television venture, Oliver expressed confusion as to why “some poorer Britons choose to eat chips and cheese out of Styrofoam containers while sitting in a room with a massive fucking TV”. The blog post goes on to argue that the popular chef is ignoring the realities of aggressive advertising for fast food, its addictive properties, and the simple fact that those with less income tend not to live near farmer’s markets and work too much to make meals from scratch every day.

Clearly, Jamie Oliver is glossing over the complexities of the link between poverty and poor diets – it is not simply a case of people choosing to buy massive TVs in detriment to fresh lettuce. However, that such a link exists has been proven, and not only in countries whose culinary claim to fame is fish and chips. In Portugal, for instance, 70% of those in the lowest educational level (around 23% of the population) are overweight[ii]. This number contrasts with the 41% rate of excess weight for the top level of education.

In Portugal, it is estimated that the economic burden of obesity represents 3,5% of expenditure for health. It also has unquantifiable effects on quality and duration of life. As is obvious, then, this is a matter of interest to policy-makers. But how can economic policy curb obesity?

Firstly, let’s assume that unhealthy food is consumed because it is cheaper than maintaining a balanced diet. While intuitively this may seem like an outlandish proposal (as unhealthy food is usually ready-made and therefore more expensive) there is evidence to support this premise. The UK Women’s Cohort Study[iii], one of the few studies to empirically evaluate food costs, concluded that the healthiest portion of its population spent, on average, 617 more pounds sterling on food than its less healthy counterparts. Most of the expenditure was allocated to fruits and vegetables, meaning that produce is more expensive than perceived. This makes sense because fruits and vegetables are less energy dense than potato chips, making their cost per joule relatively higher. Accordingly, energy dense foods offer the most dietary energy at the lowest cost[iv].

If people eat unhealthy food because it is cheaper than alternatives, one way to persuade people to stop doing so is to increase its price so that it is relatively cheaper to buy healthy food. An obvious way to do this is to impose a tax, not dissimilar to the sin taxes associated with alcohol and cigarettes.

Studies show that a small increase in the price level of take-out would have a great impact on the amount of take-out that is consumed, as the elasticity of demand for food outside the home is 0,8 – an extremely high value[v]. However, not only would this change the quantity of healthy food consumed (the substitution effect), it would also make consumers poorer (income effect) and shift them onto a lower level of utility. (It is useful to note here that consumers’ utility curves are generally quite myopic and tend not discount for the future, therefore not taking into account the health benefits associated with healthier eating.) In this sense, a “fat tax” could have the perverse effect of making the poor poorer. This tax would affect the poor more so than the rich not only because the poor consume more unhealthy food, but also because those on lower incomes spend a higher proportion of their money on food.

To counter this, the revenue resulting from the tax could be used to subsidise healthier foods. However, since the increase in price for unhealthy foods would lead to a drop in its demand, the revenue resulting from the fat tax would likely be insufficient to cover the subsidies for healthier food. One way to perhaps buffer the shortfall in revenue could be to take the forecasted savings in health spending and to use it to subsidise healthy foods.  Alternatively, the revenue could be used to provide a subsidy for lower income families to compensate them for their loss in income so as to bring them back to their original utility function (albeit at a different point).

Another factor that contributes to the high consumption of unhealthy foods is the palatability of sugar and fat. Simply put, fatty sugary foods taste a lot better than broccoli. In fact, it could be argued that healthy foods are an acquired taste, meaning that the utility derived from their consumption increases with quantity consumed[vi]. This effect is observed in products like wine, and explains why English people drink tea and Portuguese people drink coffee – both beverages are acquired tastes that have been so deeply ingrained into culture that their consumption is ubiquitous. By “forcing” people to consume healthy food via the aforementioned price mechanism, policy-makers could potentially catalyse the cultivation of tastes in favour of healthy foods, effectively changing the rate at which people are willing to substitute fats and sugar for fruits and vegetables (the marginal rate of substitution).

 The fat tax is undoubtedly controversial. On one hand, it is important to prevent obesity so as to increase length and quality of life, as well to save on healthcare. On the other hand, in spite of its long-term benefits, and even while attempting to subsidise alternative foods or cash transfers, placing a sin tax on an elementary good such as food would likely lead to decreasing levels of utility (again, because long-term gains aren’t taken into account).  

 Thanks to its short-term pitfalls, the fat tax would be a politically unpopular proposal and therefore unlikely to ever be introduced.

 

 Margarida Madaleno, 671

 


[ii] Carmo I, Santos O, Camolas J, Vieira J, Carreira M, et al. (2008) “Overweight and obesity in Portugal: national prevalence in 2003–2005.” Obesity Review 9: 11–19

[iii] Cade J, Upmeier H, Calvert C, Greenwood D. Costs of a healthy diet: analysis from the UK Women’s Cohort Study. Public Health Nutr 1999;2:505–12.

[iv]Drewnowski, Adam, and Specter SE. “Poverty and obesity: the role of energy density and energy costs.” The American Journal of Clinical Nutrition 79 (2004): 6-16.

[v] Andreyeva, Tatyana. “The Impact of Food Prices on Consumption: A Systematic Review of Research on the Price Elasticity of Demand for Food.” American Journal of Public Health 100.2 (2010): 216-222.

[vi] McCain, Roger. “Reflections on the cultivation of taste.” Journal of Cultural Economics 3.1 (1979): 30-52.

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Author: studentnovasbe

Master student in Nova Sbe

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