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10/08/2006

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Will

I assume that you have already read this, but I thought others may be interested in this paper that address the flaws behind a fat tax and other "internality" problems. See Against the New Paternalism: Internalities and the Economics of Self [http://www.cato.org/pub_display.php?pub_id=5531]. Like the paper suggests, adding a fat tax ignores the fact that people may have already negotiated the cost of increased weight amongst their present and future selves and therefore a tax would decrease overall utility and not increase it.

MEL

I am surprised that neither Becker nor Posner considered a “sin tax” such as a tax on unhealthy fats as a source of government revenue to be compared to other methods of collecting government revenue. While I strongly object to paternalistic government behavior as it so often gets it wrong relative to individual decision making (one just needs to remember the old FDA food pyramid), I generally support pigovian and paternalistic taxes if the revenue collected from them replaces taxes that are clearly less efficient methods of government revenue collection such as the corporate income tax.

The real question to me is whether there is “clear and convincing” evidence that the taxed behavior is actually a negative externality or if there is “evidence beyond a reasonable doubt” that the taxed activity is unhealthy, and if the revenue collected could be used to lower or eliminate a more inefficient tax. I require the higher burdens of proof in order to balance the tendency of government officials to excessively micromanage in order to appease special interests. Otherwise flat taxes on general behavior such as overall consumption are preferable to me.

gary lammert

Perhaps there should be a 'fat' tax on enders dealing in subprime instruments, interest only home loans, or ARMs. This junk has caused a deleterious 'inflationary fat' whose harm will soon become apparent to the national and global economy.
Who really wins or loses with excessively easy lending terms
or excessively low interest rates?

In the late 1920's buying on credit became widespread. Automobiles,
radios, washing machines - all became available to the American wage
earner - on credit. And they consumed.... and consumed in bolus mass.
On the stock exchange ten percent margin was available for
speculators. Borrowing became rampant. Stock valuation become
overvalued and assets relatively over consumed. The population of
consumers in need of a radio, washing machine, automobile, et. al.,
was rapidly depleted. Ongoing consumption at the median
credit-dependent bolus rate was impossible. Inventories accumulated
and workers were laid off, with the resulting inability to pay for
their own assets acquired on credit. The assets were then repossessed
increasing the already over supply. The deflationary macroeconomic
negative feedback system proceeded in a necessary and mechanistic
fashion.

Lenders were left with repossessed assets whose worth was less than
purchase value - with a falling population of potential consumers.
With less product demand factory owners with capital debt for
machinery and buildings were unable to maintain payments. Stock on ten
percent margin became more than just worthless, it became a liability,
as obligations to pay the entire purchase amount remained even as the
stock valuation decreased by 25, then 50, then 75 percent. As the
macroeconomic system unwound into a deflationary collapse in 1932; the
debtor of last resort, a debtor whose balance sheet was quite good,
became also the employer of last resort. And so as the US GDP
collapsed by 40-45 percent, the US government began its work projects
program creating some of the public infrastructure that still serves
its citizen to this day.

Fast forward three generations. The marvels of the late 1920's were
replaced by the computer, its software, and the new information age of
the nineties. Over borrowing and over investment in this arena left
warehouses full of enough fiberopic cable for a generation and an 80
percent collapse of the NASDAQ over the exact same time frame as the
DJIA top to bottom period from 29 to 32. 'Replaying 1929' - US's, not
the United States', but Urban Survival's insightful recognition of
what was transpiring, i.e., 1858's second subfractal's Groundhog's Day
to 1929 was an instant attractor to the website for all who
qualitatively, and for fractalists, quantitatively, appreciated the
nature of cyclical events.

1932 was not 2002. The internet collapse, while wiping out more than 6
trillion dollars of paper value, had little effect on the GDP. Times
were different. A strange set of world circumstances existed in 2000.
Emerged was both a single superpower with an unparalleled military and
nuclear arsenal and a rapidly evolving, highly capable and rising
manufacturing giant with a massive population willing to work 60-80
hours a week at 1/10-1/20th the cost of the superpower's worker. Even
with oceanic transportation of goods, the American consumer reaped the
benefits of these low cost items. American industry could not compete
and jumped in, closing their own manuafacturing plants, and began
marketing and enhancing the distribution system of foreign made
goods.

At the same time the Federal Reserve and Financial Big Business
synergistically created the last 'great' American industry. This
powerful industry increased the money supply faster than at any other
time in US history. That industry could be labelled 'US Lending
Unlimited.' In the 21st century, that industry has shoehorned the
average American citizen into the role of debtor of last resort. The
citizen-wage earner has been enticed into a speculative housing asset
bubble greater in proportion and magnitude than any prior historical
bubbles.

The new lending parameters have made initial house ownership less
expensive on a monthly basis than rental. They have divorced the
value of homes from traditional savings and wages. The new rules have
artificially inflated the purchase price of homes. Wages have not
proportionally increased, leaving the interest and principle debt to
wage ratio and long term debt burden significantly higher. Equity from
that 'artificially' inflated price has been extracted in record
amounts by home owners who have gone on a consumption spending spree,
bolus consuming items in a two-three years that might otherwise have
been consumed over a decade. Home values soared eventually pricing out
the entry population. Building continued and oversupply resulted.

Now to this mix comes higher property taxes, higher insurance rates
especially in eastern and southern coastal states, and a large
population of readjusting ARM's with higher monthly payments. The
inflationary true debt burden and costs become too many straws for
the camel's back. The oversupply of washing machines and automobiles
in 1929 and fiberoptic cable in 2000 now resonates with the incipient
cateclysm in the over supplied housing market in 2006. The money made
by the builders which was no longer being invested in the housing
markets found its way into the equity market, the last game in town -
for one last blow-off. The composite Wilshire nominally is still 1100
billion or so below its March 2000 value and using housing prices as
dollar-denominated purchasing power is valued at perhaps 60 percent of
its March 2000 worth.

Meanwhile there is very little the US can exchange with its Eastern
'trading' partners except its paper currency and a promise to pay
interest on that paper. This strange symbiotic relationship has
provided 'the glut of world dollar savings' that has serviced the US
federal debt and maintained low interest rates. The US dollar, because
of America's superpower stature, continues and will continue to have
value in its purchasing ability of dollar-denominated oil. As
commodity assets, equity assets, and real estate assets deflate, the
value of the dollar will increase in its purchasing power. Friday's
breakout of the dollar is occurring as an expected coupled event with
the collapsing US housing market and incipient uS equity collapse.

So who wins when credit is so unregulated and made so easy that not to
borrow is to lose money? Who wins when real ongoing inflation creates
a disincentive to saving? As the economy collapses; and folks are
unable to repay their loans; and lenders acquire assets that cannot be
sold; and the world becomes a much more dangerous place - the answer
becomes apparent: no one.

Gary Lammert

mlm

I'm going to go non-Libertarian here, but I've always advocated municipalities using collection of "sin" taxes for health-related relief only--not general budget balance. (California does this to some degree with their tobacco tax.)

If leveraging a behavior modification tax is the ultimate goal, shouldn't the tax proceeds be used to pay for healthy food subsidies (seed money for organic stores in low income neighborhoods?), etc.? I realize that example may be the worst one for a die-hard group of economists, but behavior modification relies upon things like this.

Additionally, one of the most enormous direct expenses--and rising--related to obesity for folks on Medicaid (aside from co-morbidities), is bariatric surgeries and complications. Could these be directly linked in some way to the tax? I think if tax payers saw a direct link to the dollars and problem there would be a bigger investment in discouraging healthier behaviors. Why don't we see direct advertising like we do with tobacco and drugs (ala, "this is your brain on drugs")?

With all of that said, I don't even support this fat/food tax--ultimately the net gain is unsubstantial and regressive. HSAs are even worse--they draw healthy people from the general risk pool, making health insurance more costly and unattainable for the people who really need it (sick and poor--not necessarily people who make bad health decisions); this will put more people on public assistance or without insurance. Furthermore, HSAs still expose people to a substantial amount of risk and cost, they just cushion the catastrophic costs. These are not an answer to rising health care costs.

SJC

Why not place a sin tax against fat-induced health care expenses? Obesity itself isn't really a problem to the rest of us, but it does become one when lipo-suctions and triple stomach staples are needed.

It's great that sugars were also blamed. Has anyone checked an Oreo nutrional factsheet lately? A cookie has as much calories as a thick slice of bread!

Justin Domke

Note that it is not at all clear how high the externalities of eating junk food are- or if they are even positive! Certainly, in the short run, people who harm their health by eating fatty foods may increase the cost to taxpayers. However, these people may also die younger, thus subtracting whole years that they would be collecting social security and medicare.

Put this way, suppose the average cost of supporting someone through a terminal illness is I, and the cost of supporting someone through a year of health is (on average) H.

If a health person lives an average N years their cost is N*H + I

If one decreases one's lifespan by Y years, their cost is instead (N-Y)*H + I

These calculations are rather chilling, and I personally would still support government taxatioin of unhealthy foods, but we should be clear on the reasons.

NIH Scientist

"Sometimes I wonder whether much of the public outcry over the gain in weight of teenagers and adults stems mainly from the revulsion that many educated people experience when seeing very fat people. Surely, though, this should hardly be the ground for interventionist policies!"

Perhaps Prof. Becker is correct and my desire to to see measures adopted that will keep Americans from becoming more and more grossly obese is discriminatory and racist.

However, I think he underestimates the degree to which our society is affected by this epidemic of morbid obesity.

The contrast between the body habitus of the typical European and American could not be more striking. After traveling in Europe, one immediately sees the extent of the problem upon entering an American airport. A large fraction of the American populace is not just obese, but grossly and morbidly so. Many are grotesquely obese, inhabiting huge deformed bodies for which every movement a challenge. Such miserable people are physically challenged every day in thousands of ways. Is this really the direction we want our
society to be going? If the problem is largely caused by technological advances on the part of the food industry in advertising and food science that makes their product almost addictive, government regulation is surely the only remedy.

BC

If foods high in fat and sugar, do, in fact, lead to higher heatlh costs related mainly to obesity, heart disease, and diabetes, then I believe imposing taxes on these goods is appropriate. I would prefer to see the price of all goods and services reflect the full social cost of producing and consuming them. Substantial taxes on cigarettes, alcohol, gasoline and other products that cause significant pollution are appropriate for the same reasons. I think the economy works best when resources are allocated as efficiently as possible. To approach that goal, I think we need to attempt to make sure that goods and services are priced to reflect their full social cost. Even if we go too far and levy taxes that push the final price of these products above full social cost, the excess revenue that accrues to the government sector can allow us to reduce other taxes that cause more economic harm.

joe

Is there a way to directly incentivize excercise? Say, a subsidy for running shoes? Or by somehow proving that you're not sedentary?

michael choe


it's not just 'educated' people who can't stand the sight of obesity. it's everyone.

Paco

Dear Prof. Becker:

I very much enjoyed reading your thoughtful analysis of the pros and cons of imposing a sin tax on fatty foods. I just wish to make two additional points:

1. Justin's point about obese people dying younger (an important point that has also been made in connection with tobacco). That is, while it is true that obese people on average have greater health problems than non-obese people, nevertheless obese people (like smokers) may actually impose less costs to society at the margin since they die younger.

2. Though I perfectly understand your argument about a higher price leading to a reduction in the consumption of fatty foods, Adam Smith famously argued that the opposite is true with respect to certain products (such as wine). If I recall my reading of The Wealth of Nations correctly, Smith argued that when wine was cheap and easily available, people actually drank less than when it was taxed heavily and difficult to procure. Perhaps Smith was just wrong, but I have always been struck by this argument because, though counter-intuitive, it seems to explain the different patterns of behavior towards drinking we see in America and Europe.

MikeM

Paco,

I doubt whether putting up the price of junk food would cause it to become more popular.

In my part of the world (Sydney, Australia) there is an interesting experiment going on that may shed light on this very question.

A Krispy Kreme donut franchise recently started operating here with, so far, a dozen stores. I went past one the other day which was selling plain donuts for $2 each. Our local hot bread shop sells plain donuts for 65c each.

Null hypothesis: availability of higher priced donuts will not increase donut consumption.

Predicted outcome: The Krispy Kreme franchise will either go broke or drop its prices to be more competitive.

Emma

I work with the National Association of Margarine Manufacturers so I’m well informed on this subject. Have you looked at a margarine label lately? You won’t find any soft or liquid margarine that contain trans fat, and trans fat levels of stick margarines have been greatly reduced. Margarine manufacturers continue to be the leaders in the food industry in removing trans fats from products, and they continue to innovate the market by adding healthy, functional ingredients such as antioxidants, omega fatty acids, and fat-soluble vitamins to products.

The margarine industry has made such an impact in providing healthy product that in 2005, when the Dietary Guidelines for Americans and the MyPyramid food guidance system was issued, liquid oils, and soft, trans fat-free margarine spreads were classified by the Dietary Guidelines Advisory Committee Report as helping to meet the essential fatty acids and Vitamin E needs of consumers.

To learn more about the benefits of margarine products, check out these links: http://www.margarine.org, http://www.cfsan.fda.gov/~dms/transfat.html#choice1 and http://margarine.org/pdf/inthenews_092906-nytimes.pdf

W

I'll keep this short.

Becker is right that pleasure counts, but there is no reason the state shouldn't prevent wife beaters from getting sadistic pleasure out of beating their wives. Becker admits that we're talking about teens who lack mature judgment, but leaves out that these teens are being raised without a stay-at home parent who monitors their nutrition, like the mothers of yesteryear used to do.

Much of the pleasure these teens are experiencing is a result of leisure. If the kids were sedentary because they were studying, perhaps Becker would have a stronger argument, but the kids are lazing about. They should be exercising more, have better diets, and study more.

Lastly, we need both carrots and sticks. We certainly should subsidize fruits and vegetables, but we also should penalize those who eat fatty foods. The tax can fund the subsidy. We should also mandate exercise in school and condition federal tuition aid on health. If you haven't the discipline to get in shape, there's no reason other taxpayers should pay for your education. We save you costs if you save us costs.

Becker seems to have ignored that fat people are free-riders.

N.E.Hatfield

Hmm... and I always thought it was an energy balance equation between caloric intake and caloric expenditure. In the past Americans had lower caloric intake and greater expenditures, yet that also resulted in poor health. Now it's the opposite, but the end result is the same, poor health.

Perhaps we all should be trained in the importance of diet, nutrition and exercise at an early age and continually indoctrinated in it until it becomes second nature. But probably an impossiblity, due the profit motive inherent in food production these days. We really can't afford to pull the pop machines and snack machines out of the schools and the like. It would cut into the paybacks the school boards get from the producers and I won't even mention the disaster the school lunch programs have become.

Energey Independence Now!!!

We really can't afford to pull the pop machines and snack machines out of the schools and the like.

We can't afford to divert into solar, wind, biodiesel or so forth either because it will upset the oil companies...What poppycock!

jeff

Margerine-yuck

Meredith Olson

Why do people consume food that is high in suger, saturated fat, and loaded with preservatives? Because it's easy!

Yes, I do derive pleasure from consuming a big mac, but I realize far greater pleasure sitting down for a home-cooked meal with my family. Unfortunately, after working 10 hours, picking up the kids from childcare and commuting home, the last thing I want to do is spend another 30 minutes preparing dinner. I would rather consume precious leisure time playing with my children than cooking alone in the kitchen. Fast food is my alternative and the trade-off is poorer nutritional content. So the decision is time vs. nutrition.

I suppose the time factor could be mitigated by eating fresh raw foods such as fruits and many vegetables... but doing so requires a stocked refrigerator and increased frequency of grocery store runs (to ensure fresh produce.) So when my options are grocery store vs. drive-thru, once again I face the time vs. nutrition decision.

Grocery stores recognize this issue and are now offering more "ready-to-cook" and prepared meal options. Per serving prices on these meals are competitive with fast food, but you still have to get out of your car, unbuckle the car seats, wait in line, etc. So the convenience factor remains an issue.

Surely there is a market solution to this problem. Imagine the increase in government size to develop and monitor a fat tax! Imagine the questions- Would a tax cover fast food only? What about restaurant food? Would a tax apply to specific entrees only, or all food on a restaurant's menu? Would a tax apply to grocery products? Red Meat? What about peanuts or olive oil? Avocado? Would a tax apply to organic foods high in fat?

Compliance would be a nightmare! As a society are we willing to pay for both the tax and the compliance costs? Alcohol and tobacco could serve as a guide for compliance costs...but it's pretty easy to determine whether a product includes alcohol or tobacco. Much harder to determine whether to tax an avocado. Do you tax a fresh avocado, or only if it's been turned into guacamole and eaten with tortilla chips? I can't even begin to imagine the nuances.


Gilding the lily

To MikeM,

You suggest/predict that Krispy Kreme donuts will either:

1) Go out of business due to its overpriced donuts, or

2) Decrease its price to compete with the mom-and-pops that sell donuts for 65 cents.


I can answer you with one word: STARBUCKS.

Before Starbucks, people purchased coffee for one dollar. Nowadays, people in mass, delightfully give an arm and leg for grande coffee with a 10 cent splash of vanilla.

MikeM

STARBUCKS...

Interesting point, G-t-lily.

Australia has a long tradition of good coffee shops started by Italian immigrants in the 15 years after WWII. After arriving in Australia 6 years ago, Starbucks has managed to establish 50 shops. It is not exactly taking Australia by storm.

Gloria Jean is an Australian owned coffee shop franchise with similar shop ambiance to Starbucks but price-point closer to a good espresso bar (around $A2.50 for a long black or flat white). Gloria Jean has less focus on the exotic confectionary that Starbucks crams into some of its cups. By 2001 it had 285 stores in Australia (probably twice that now) and operates in 20 countries.

Starbucks may have been a success in the US because before them Americans did not know what decent coffee was like.

There are shops in Australia that make pretty good donuts too.

Political Umpire

"Sometimes I wonder whether much of the public outcry over the gain in weight of teenagers and adults stems mainly from the revulsion that many educated people experience when seeing very fat people. Surely, though, this should hardly be the ground for interventionist policies!"

Uncharacteristically flippant from the learned Professor! One can see many an externality from obesity, which is becoming frighteningly prevalent in the US and other developed countries: increased healthcare costs and decreased labour productivity for a start, though I guess you could be callous and say that shorter life expectancy will lead to lower costs of pensions and old age care.

Slapping a fat tax on certain foods may not be so effective in that obese people will probably be willing to spend more if necessary anyway, eat larger amounts of less fattening food and so on.

Interesting to see acknowledged that there is obvious pleasure derived from consumption of junk food. Funny how the same never comes up when discussing drugs: how much pleasure the users derive. Banning something because it is harmful even though people enjoy it would compel the banning of kissing, for example, since aside from giving pleasure all it does is spread disease.

Perhaps the answer is for health insurance costs to reflect (as I'm sure in many instances they do) the standard of health of the insured; that would provide an incentive to change one's entire lifestyle rather than search for less heavily taxed junk food alternatives. And, of course, better education about health should be a priority, together with better food provided to schools and other state institutions. For a vivid demonstration of the benefits of such a programme, UK readers should refer to Jamie Oliver's work with British schools, and US readers should watch the alarming film "Supersize Me" - in particular the scences in schools and corrective facilities.

Cyril Morong

The fat tax might be another example of how one government intervention leads to another. The government partly pays for health care. So then someone says "tax fatty foods" to keep taxpayer costs down. There would be no argument like that if the government were not funding health care to begin with. Then we may need more bureaucracy to make sure the fat tax is being paid. Then what about illegal sales of fatty foods, like the sale of illegal cigarettes. We need more law enforcement for this. So the government keeps growing. Or people just might bake more cakes and cookies at home. Then fat consumption does not change but we have a deadweight loss since people have less time for other things.

Ben

Isn't there already a "fat tax"? Fatter people have fewer marital choices, fat women marry poorer guys, they are the butt of cruel jokes, they can't do fun active stuff, or enjoy it as much, and so on. Why would we assume that a tax would do a better job of deterring obesity? Perhaps someone could quantify the current fat tax and compare it to the proposed government fat tax to see the relative size.
I say there is a cost to even making such proposals, especially by Nobel Prize winners - it gives an implicit okay to other brainiacs thinking up good ways to improve their neighbors' behavior. I think the world has had enough experience with such good ideas and the suffering they have led to.

Katherine

Dear Dr. Becker-

The irreverent comedy South Park took up the issue of online gaming's negative health effects in its season premier. I recommend that you enlist one of your research assistants to track down, via BitTorrent, the episode entitled, "Make Love, Not Warcraft."

Knowing several young men who suffer from World of Warcraft "addictions," I have no idea what additional costs might dissuade these gamers from spending hours in front of the computer. It is more than likely that my friend B****** knows that he is out of shape and lacking female companionship because he plays World of Warcraft for hours, but he seems quite content to forgo health and sex to play this silly online game. It's enough to make me throw my hands up and declare, "De gustibus non est disputandum!"

Chloe

Why don't we just tax fat people?

I am only slightly joking. It does seem like the rational thing to do, given the rationale. The thin people who drink soda aren't the problem. It's the fat people who do.

It seems like this "fat tax" should be taken care of through insurance. It would make sense for insurance companies to charge them more for health care, whether they get it through a government agency or not.

Additionally, I think much more could be done with advertising, public awareness campaigns and pressure on companies to give healthy choices.

There is one last issue:

There just isn't access in the ghettos to the same healthy food that the rest of America has. Ofttimes, corner stores similar to 7-11 are the only options for people in extremely poor neighborhoods. Try finding something healthy to eat there. For instance, there has never been a full service grocery store in South Central Los Angeles. This is quite common in poor neighborhoods.

I don't have an issue with charging people for their choices, but in these cases, it's not much of a choice.

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