Fat tax: Unhealthy tool in fighting obesity

In fighting obesity and the high health costs involved, a pigovian tax on unhealthy food is often considered by governments. In 2011, Denmark even implemented the so-called fat tax.

An important reason for implementing the tax is enforcing a change in consumer behavior by changing the relative price of healthy food with respect to unhealthy food. Another reason is covering the social (health) cost associated with unhealthy food patterns that can lead to obesity. Buying unhealthy food will make you contribute to these costs though the tax.

This article focuses mainly on the first mentioned reason and argues that this reason is not legitimate when we look more closely at the market and consumer preferences.

The movie Food, Inc. by director Robert Kenner, is a fascinating movie on how the American food industry is manipulated to serve the consumer with low priced unhealthy food. It highlights briefly the largest group within these consumers: the poor. According to a research by Truong & Sturm (2005) this is exactly the group with the biggest obesity problems.

The relative price increase of a normal good in general cause less consumption of this good with respect to the other goods in the market. Lets assume that there are two types of goods: healthy and unhealthy meals. The idea is that a consumer will substitute the unhealthy food for the now relative less expensive healthy food.

Imagine a low-income family, in which both parents work a lot. Driving to a fast food restaurant on regular basis to get a quick and relatively cheap meal is beneficial for them. The effect of a price increase in the unhealthy meal will cause a different effect for them than the just described general thought. Until a certain price this family will considers a fast food meal to be a Giffen good. This means that the positive income effect is larger than the negative substitution effect for the unhealthy meal. The low-income family has to visit the fast food restaurant an additional time in the week because of a decrease in their purchasing power.

Also in supermarkets the tax will not give the expected result. Supermarkets will spread the costs of the fat tax across all products, like they did in Denmark (The Economist, 2012). The general idea of will not work out. For those who consider both types of food as normal goods, behavior will not change since relative prices stay the same. According to the reasoning above this will again cause contrasting behavior of the low-income family.

Even if there is a general substitution away from the taxed unhealthy food, consumers will and can easily substitute unhealthy food for other untaxed unhealthy alternatives (Smed et. al., 2005). There is a lot of discussion on the definition of unhealthy food, however it is not the type, but the amount consumed that causes obesity.

To conclude, a fat tax will have a negative impact on the purchasing power of consumers. More important this government intervention will not cause the expected results in consumer behavior. The only substitution away will be to other types of unhealthy food. Consumers with lower incomes (the group considered to be most likely facing obesity problems) will even show behavior contradicting the general theory.  The fat tax is therefore not the right tool to change behavior in unhealthy food consumption.

Stefanus Leeffers (#642)

Minimum Guaranteed Income – Theory put to practice

In the academic course of economics, the feeling of being trapped in the mathematical web of theoretical models is not uncommon. Even as the plot thickens, some may still crave to directly apply knowledge and tools so as to see how the world would naturally respond to our actions. Luckily, there exist rewarding subjects relying almost solely on real life decisions and policies and on the analysis of their consequences – namely Public Economics, the study of government policy and intervention. On this subject, one may want to shift their focus to the branch of Public Finance and analyze the public sector and the government role and its decisions and policies, with their real life results. This is, therefore, an area of study easily transposable to the real life framework and it is somewhat interesting to observe current events relating to this subject.

 

Such examples of social intervention are Minimum Guaranteed Income (MGI) plans. Common traits of an extensive list of countries, these social plans are one of many existing approaches to fight poverty, aiming for equity. Their strategy consists of drawing an income threshold (a poverty line, so to speak) below which an individual qualifies to receive the monetary difference between their current income and the established threshold.  The ongoing debate, however, sheds a very unflattering light on these programs, as they may provide perverse incentives for labor participation; when dealing with a MGI plan, both economic theory and empiric evidence suggest that the design of the strategy may drive the beneficiaries away from the labor market.

 

As depicted in the above graph, establishing a MGI policy leads families living below the threshold line to completely withdraw themselves from the labor market. It becomes then necessary to take action and reverse the incentives, by lowering the threshold, impose conditions upon which the candidates become eligible or establishing earnings disregard policies, which lower the implicit tax rate on earnings.

The Portuguese Rendimento Social de Inserção (RSI), akin to similar minimum guaranteed income policies, provides a real life example of such measures. As of February of 2013 the threshold below which individuals qualify to receive aid has been lowered, a situation that has been occurring for the past years. The underlying reasons for this refer to budget deficit control and reduction in public expenditure; nevertheless, it is important to note that these changes are prone to affect the number of beneficiaries, as well as the labor participation.

 

It is, of course, not enough to rely on economic theory alone, or expect empirical evidence to easily provide all the answers, but it is nonetheless interesting to observe the theory coming to life and the economic tools being put to practice. Even in simple cases.

 

Carla Ferreira #636

Oh, you think tax havens are good for the economy?

Source: http://www.abendblatt.de/img/sport/crop105734922/1160693625-ci3x2l-h307/bayern-HA-Sport-Muenchen.jpg

Watching the video of the Center for Freedom and Prosperity on „Why tax havens are good for the global economy“ http://www.youtube.com/watch?v=yi0lkJBTi58, I, after taking a course in Public Economics, was quite shocked that it even is possible to claim a ‘scientific’ linkage between the economic performance since the 1970s and the existence of tax havens.
I got quickly suspicious of how the narrator was quoting reports and research papers on the issue of tax havens and tax competition. The main trick, in my view, is that tax competition is sold as being exactly the same thing as setting a framework for tax evasion.
The OECD is mentioned as the penitent bureaucracy which admits that „the ability to choose the location of economic activity offsets shortcomings in government budgeting processes, limiting a tendency to spend and tax excessively“http://www.oecd.org/eco/outlook/2088806.pdf. However, this citation is clearly taken out of the context, presented in a way that fits the Center’s objective. In the OECD’s report on „Forces shaping tax policy“, the sentence appears in the context of a geographical mobile tax base (p.10) and is followed by the insight that a too high downward pressure on tax rates eventually would lead to a too low governmental revenue raised.
Moreover, after having identified several efficiency problems with high tax rates, the OECD states that the main objective has to be to minimize distortions while governments still are able to raise the needed funds, and points out, that threats like a mobile tax base rather have to be faced by international coherent practices. The OECD is concerned that „It is increasingly difficult for individual countries to manage their tax bases in the face of these forces and, in particular, some tax practices have led to harmful and distorted cross-border ‘tax competition’“ (p.13).
So, I would definitely not say, that the OECD now is in favor of tax havens or tax laws that are harming other countries in raising the revenue that is needed.

The statement that tax havens „promote good policy around the world“, I have to comment on.
Tax competition may be good in a model set-up of Leviathan governments as they would lead to a more disciplined usage tax revenues. However, political accountability is worsened, and hence, the overall effect is ambiguous.
And how to define good policy? Ain’t it be the case that tax rates are set in such a way that they generate the country specific revenue income? Because, I would claim, that this revenue level is distinct in every nation, depending on the coverage and degree of social services provided by the state and the demographic composition, implicitly being a reason for why tax rates never will nor shall be the same.
Also the claim that „tax havens generate high living standards. Grow faster and create more prosperity“ was proofed wrong with the case of Cyprus.

One general remark on tax evasion – the illegal form of tax avoidance – which I do conceptualize with tax havens, not tax competition: At the time, there is a debate going on in Germany on the legal treatment of tax evaders that report themselves to fiscal authorities.
Having in mind that one aim of taxes is to redistribute income between groups – fairness in society – I do not see any benefit for the global economy, welfare or equity improvements when better-off individuals park their money in Switzerland. Cause the milliards of euros that are hidden from the fiscus thus have to be generated by the rest of the population – to call it a peccadillo is just outrageous.

Christiane Seidl

Krugman – Don’t let him be misunderstood

With “Taxing Job Creators”¹, he picks up the dispute of Democrats and Republicans when it comes regarding taxation of top-earners.

Reading through the comments left me in total confusion – Is it possible that a Nobel Prize winner is missing points of Economics 101? Not few did criticize him, and yet, though hidden in a camouflaged mocking of conservatives, he has a point, and an important one, I would claim.

 

Krugman, being a liberal himself,  is focusing on the political arguments of rightists; two common ones (expropriation and responses at the intensive margin) he considers as being dull, but the last – “You’ll kill job creation!” – seems interesting to him.

He argues, by referring to a paper of Diamond and Saez (D&S), that the marginal tax rate at the top should lie around 70% – but the main purpose of the short article is to challenge the conservatives’ justification of keeping the tax rates low: claiming their arguments to be rooted in the concepts of free-markets, he argues, is ignorant, since it is not embedded in the theory at all. Indeed, his last sentence does capture his point perfectly: “Even if you believe that the top 1% or better yet the top 0.1% are actually earning the money they make, what they contribute is what they get, and they deserve no special solicitude.” Meaning, that what they create already is measured by what they contribute to GDP – the rich are not the job-creators, and for that reason they should not be treated differently; the reasoning behind is easily grasped: there is no direct income effect on other individuals when you choose to work one hour more or less. And this is always true.

Many did attack Krugman for not taking into account multiplier effects, but I think they are not relevant for what he is trying to tell us. Even though the rich do send a bigger paycheck to the government, at the margin, any person of any income group, is equalizing benefits and costs. So, the principles of free-markets can never justify subsidization (= lower marginal taxes). Recall, the real effect is caused by an eminent substitution effect at the kink of the budget constraint where a higher marginal tax rate  causes government revenues to shrink. However, the effect is assumed to be quite low for the top of the top, implying that overall revenues will increase.

Taxation is the government’s tool to redistribute, and if it really is like D&S suggest – 1$ to the government contributes more to society’s welfare than if that dollar is consumed by a top-earner – there is no plausible reason to not try to maximize the revenue that can be collected from that group. The only constraint is set by balancing the trade-off of marginal gains in revenue and rising distortion due to taxation².

 

To close the circle, exactly that trade-off is why the optimal tax-rate on high incomes should be lower than 100% – but, there is no space for arguments totally unconnected with basic theory of public economics.

 

 

Written by: Christiane Seidl

 

 

1Krugman, Paul. 2011.Taxing Job Creators, The Conscience of a Liberal. The New York Times. The Opinion Pages. http://krugman.blogs.nytimes.com/2011/11/22/taxing-job-creators/ (visited 02.04.2013)

2Diamond, Peter and Emmanuel Saez. 2011. The Case for a Progressive Tax: From Basic Research to Policy Recommendations. Journal of Economic Perspectives, Vol.25 (4), p. 165-190. http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.25.4.165

A bad example to collect money

The solidarity surcharge in Germany – Abuse of a moral concept

 

After the reunification of Germany, Chancellor Kohl was in need of raising funds to build up the new states: The solution was an increase in the payroll, income and corporate tax of 7,5% in 1991, which was meant to be an one-time incidence.
However, this solidarity surcharge is still visible on every German taxpayer’s wage slip, month after month, year after year – even if the proportion was lowered to 5,5% in 1995, this voluntary transfer applies to all income classes.
Furthermore, a solidarity pact was implemented on communes in West-Germany in 1993, that had the same purpose: Aufschwung Ost (reconstruction of the East).

From an economic perspective, both policies performed poorly in channeling resources, or increasing equity within the country:

• The solidarity surcharge is paid by West- and East-German tax-payers alike, so individuals face only losses.

• The money flows directly into the government’s moneybox; there is also no requirement, and therefore no guarantee, that it is used on investments in the Eastern part.

• The money raised since 1991 amounts to €187 milliards, whereas the Federal state did spend over €1 billion¹ on the renovation of the East zone, and it is far from being completed. In this perspective solidarity contribution is a minor source of financing.

• Forced redistribution of money from communes of the old states, regardless of their capability to pay the annual share, sometimes even financed by credits.

Not only are the citizens of the donor countries shaking their heads when confronted with the recipient countries’ money waste – Airport Berlin-Brandenburg is the most recent example – but also more and more communes and cities are questioning the very nature of the pact: a geographical transfer, totally disentangled from the real needs of communes and cities: Is this how solidarity should be? That West-German main cities are operating over-aged train stations, while every small city in East-Germany has a modern one, built of light steel and glass?

 In my point of view, the fact, that the total amount of the surcharge is relative small, might be reason enough to contemplate its usefulness – to abolish the tax with the fancy name implies that existing moral hazard to waste money in East-German states, and the regional burden on West-Germany on the other hand will decline. The efficiency loss due to extra taxation may shrink as well.

However, solidarity itself may be valuable to society, such that the transfers should be maintained – in that case they should be adjusted to match the criteria, and, further, they should take into account real differences between all regions of the country, and not rely any longer on the East-West map drawn by politicians in the early 1990s.

 

 

Sources: http://www.tagesschau.de/inland/solidarpaktsolidaritaetszuschlag100.html

             1 http://www.tagesschau.de/multimedia/politikimradio/audio72336.html

 

Author: Christiane Seidl

Public Economics in countries with failed governments

We often speak of Public Economics in the context of Western countries, where we generally have what we can call successful governments. Now the question is: in the presence of failed governments is there anything useful we can learn in terms of Public Economics?

In this blog entry I try make the point that there is: as governments fail, other civil society agents are pressured to step in to tackle the issues left to meet by these failed states. My point is that maybe the right Public Sector does not lie at an extreme, but halfway between a large and relatively efficient government like we see in the West and a strong mobilized civil society we may see when states fail.

A REAL STORY

In April 2010 I went to live for a couple of weeks to Bulawayo, in Zimbabwe, a country which ranks 5^th in the index of the most failed states of 2012. While here in Portugal  the government takes in its own hands areas such as Education, Public Order and Safety, and Social Protection, in Zimbabwe due the absence of government people had to took those public responsibilities into their own hands:

• Health-wise, 20% of the population is contaminated by HIV. Because the health system is so deteriorated, the way villages found to deal with this issue was by having village health workers that are selected by the elders in each village and that use bicycles to reach the country’s most remote areas to do prevention and provide anti-retroviral drugs.
• As for Public Order and Safety, political violence during election times often threatens stability and tribal violence is also common. Once again it was up to civil society step in: while there I met innumerous projects of Zimbabwean youth that took pacification into their own hands, using the Arts as a mean to bridge tribal segregation.
• Finally, in terms of Social Protection, to a good extent the Church (in the picture above) plays part of the usual role of the state in assisting people in more vulnerable situations.

Going back to Portugal, I realized that Public Economics is not just about the government, but also about public agents like village health workers, active youth and religious authorities that take into their hands public responsibilities beyond government’s reach. This is not an argument against the welfare state, which I believe is a crucial foundation of our society, instead, this is an argument in favour of using the potential of our civil society to help sustain it and make it more effective over the long-run.

REFERENCES:

1. The 2012 Failed States Index of Foreign Policy Magazine and Fund for Peace (http://www.foreignpolicy.com/failed_states_index_2012_interactive)
2. About Village Health Workers in Zimbabwe (http://www.unicef.org/infobycountry/zimbabwe_66508.html)

Written by João Rafael Brites in February 27, 2013