Friday, July 24, 2009

Food Taxes

While channel surfing last week, I saw an advertisement against food taxes. The point of the advertisement is that there is scientific evidence that a food or beverage tax does not lead to reductions in childhood obesity, and that the tax is regressive - more painful to those with lower incomes than those with higher incomes.

I am not disagreeing with either point, and they are important considerations when having a discussion about taxing food. The point I want to think about is, when does it make economic sense to impose a tax. From Prin. of Micro, we address the economic consequences in terms of consumer and producer welfare of a tax, and find that taxes tend to reduce overall economic well-being in markets that do not suffer from externalities.

But in market with negative externalities - costs incurred by someone outside of the market situation - then taxes can be an method to correct for the external costs imposed to society and lead to a more socially optimal level of in this case obesity. I think this is the point of taxing food and beverages with high sugar or high fat content. Consumers will rationally respond to those higher prices and start to substitute away from food and beverages with high sugar or high fat towards lower sugar and lower fat content. As the prices keep rising this substitution will continue, and this is what leads to a socially optimal level of obesity.

A food tax will not cause everyone to become less obese, nor should the tax be designed to do so. What it will do is get those at the margin of obesity to change their behavior, which is the point of the tax in the first place.

I think the reason that their are advertisements against food and beverage taxes is because food and beverge firms will also have to pay a portion of the tax - think back to our discussion in Prin. of Micro on tax incidence - and this will erode the profitability of food and beverage firms.

UPDATE: For an interesting take on this topic, check out this article from the Economist.
UPDATE II: See this article in the New York Times.

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