Should we tax fat like we tax cigarettes and alcohol? The economics of nutrition

This post sketches an attempted definition of a well-crafted duty on unhealthy food, more popularly referred to as a “fat tax”.

EIGHT out of the world’s top ten fattest countries are Pacific Island Countries according to a list published by the Global Post  in November 2010 on the basis of World Health Organisation data.  NB: after a few google searches I cannot find the original World Health Organisation data but the Global Post’s list for the previous year does correspond perfectly to the WHO global BMI database.  However the 2009 list does not include data for many PICs, so for interest’s sake, and because this is a blog not an academic paper, the 2010 list in is as follows, with percentage of people who are technically overweight, obese or morbidly obese (with a BMI over 25):

  1. Nauru: 95 percent
  2. Micronesia: 92 percent
  3. The Cook Islands: 92 percent
  4. Tonga: 92 percent
  5. Niue: 84 percent
  6. Samoa: 83 percent
  7. Palau: 81 percent
  8. United States: 79 percent
  9. Kiribati: 77 percent.
  10. Dominica: 76 percent

Houston, we have a problem! 

It should be mentioned that Body Mass Index is a pretty crude measure of weight that does not account for different body types between countries.  In particular the benchmark of BMI>30 as a measure of obesity has been criticised as not appropriate for the Pacific.  Having said that, weight and diet are undeniably issues in the region contributing very significantly to Non-Communicable Diseases, alongside inactivity and substance abuse.

In an attempt to change Pacific diets for the better, some countries have tried less orthodox methods that stray into the realm of economic policy.  In a fascinating development the government of Fiji recently announced its intention to follow Denmark’s implementation of a tax on saturated fats.  In 2007 Samoa banned turkey tails although they are still allowed in if attached to a turkey.  Moreover, on my recent trip to Tonga I came across a 2009 report commissioned by the Tonga Ministry of Health recommending high import and excise duties on turkey tails and mutton flaps and lower duties on healthy foods such as breakfast cereals and vegetables.

Disclaimer: I am writing this without knowledge of what has transpired after the Tonga report nor what other similar initiatives  or analysis, apart from those I have mentioned, have taken place across the Pacific.  I only mean to lay out some thoughts on how a good dietary tax might look.

An increase in tax or import duty on food packed with saturated fat seems to serve two good purposes:

  • raise government revenue
  • reduce consumption of fatty food because such food becomes more expensive

The idea is intuitively attractive and may work well IF people do in fact change their behaviour to a healthier pattern.  Indeed we have been taxing cigarettes and alcohol for years under exactly the same principle, and increased taxes have helped reduce smoking in particular.  A number of studies have identified that they would do so for dietary taxes as well.  However, the evidence comes with caveats and there is quite a debate about the benefits of a fat tax: badly done, it could cause more harm than good. 

The first objective of increased government revenue is fairly unambiguous

However the second objective is more complex than it first appears – because it involves both human behaviour and nutritional outcomes. 

For example, one 2009 paper published in the Journal of Public Economics “explores conditions under which obesity will rise, fall, or remain intact following the introduction of a fat tax or a thin subsidy” in a food-intake rational choice model that incorporates exercise, cooking time/effort and food cost, and finds that for a weight-conscious, physically active individual, a fat tax may increase obesity through increased time spent cooking and decreased time spent devoted to physical activity.

Some empirical evidence from America shows that the magnitude of the fat tax needs to be high in order to actually change consumption behaviour: “The limited existing evidence suggests that small taxes or subsidies are not likely to produce significant changes in BMI or obesity prevalence but that nontrivial pricing interventions may have some measurable effects on Americans’ weight outcomes, particularly for children and adolescents, low-Socio-Economic Status (SES) populations, and those most at risk for overweight. Additional research is needed to be able to draw strong policy conclusions regarding the effectiveness of fiscal-pricing interventions aimed at reducing obesity.”

Moreover, on the nutritional side, a fascinating 2006 empirical paper from a UK dataset, says that taxing saturated fat may not be better for health as people may consume more salty food instead which is equally bad for cardiovascular health.  The paper’s results show (text from the abstract) that in the UK:

  1. Taxing only the principal sources of dietary saturated fat is unlikely to reduce the incidence of cardiovascular disease because the reduction in saturated fat is offset by a rise in salt consumption.
  2. Taxing unhealthy foods, defined by SSCg3d score, might avert around 2300 deaths per annum, primarily by reducing salt intake. 
  3. Taxing a wider range of foods could avert up to 3200 cardiovascular deaths in the UK per annum (a 1.7% reduction).

Thus taxing a wider range of unhealthy foods may work to “plug all the holes” so that people do in fact substitute towards eating healthy foods, whereas taxing just one unhealthy food may lead to people consuming more of others.

A point I want to raise is: a fat tax on imports could be good for local farmers who produce import substitutes such as any poultry farmers in Tonga (substituting for turkey tails?), but decreasing tax on HEALTHY imported food such as fruit and vegetables may harm local farmers who produce import substituting vegetables.  The impact on domestic agriculture of such a tax needs to be thought through.

Finally, the distributional consequences should also be thought through.  Would a high fat import duty hurt the urban, time-constrained poor too much?  The poor tend to spend a much higher proportion of their income on food.  Thus a fat tax would be likely to be a regressive tax, and the extent of this should be weighed against the health benefits of such a tax.

To summarise the messages contained in these points:

  • We need to think about the consequences of a fat tax for human consumption and lifestyle patterns.  What would people consume instead?  Would they become less physically active if they had to spend longer cooking local food?
  • Therefore we need a carefully crafted tax, possibly that captures a wider range of unhealthy imports.  In the Pacific there almost certainly isn’t the data to run statistical regression analysis but it may at least be good to consult a cross section of our communities on these behavioural questions.
  • To have a real effect on health, the tax needs to be large enough.
  • Any economic effects on local farmers would need to be considered.  They could theoretically be positive (fat tax), or negative (thin subsidy e.g. lowering duties on imported fruits and vegetables).  This is a matter for empirical observation.
  • The distributional consequences, especially in poor Pacific Island Countries, with large populations of urban poor with imported food as a high proportion of diet, need to be considered.  They would not necessarily invalidate the idea of a dietary tax but must be at least accounted for in the discussion.

One response to “Should we tax fat like we tax cigarettes and alcohol? The economics of nutrition

  1. Pingback: Trade and Nutritional Outcomes in the Pacific | LRD Economics

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