Better Than Taxing our Bad Behavior

2009-10-13 | |
Last updated: 2009-10-13

If you ask the average person whether or not they would like to pay more taxes, the typical answer is an emphatic “No!”. Generally, people consider that they work hard for their money and as a result, they want to keep as much of it from the taxman as is possible. As a result it is not surprising that when the media brings forth stories of government inefficiency and waste, our grip on our wallets becomes tighter.

A recent example of a suggested tax that has faced widespread public opposition has been the soda tax that is intended to help curb increasing obesity rates. With the typical can of sugar sweetened pop or soda having more than 150 calories, and these beverages widely identified as a significant contributor to increasing obesity levels, the desire to tax these beverages is an obvious approach to curbing obesity. Though obvious, it might not be the best way of achieving the intended effect.

The soda tax is by no means the first tax of its kind. Taxes on cigarettes and alcohol have been around in many areas for a long time as an attempt by governments to limit consumption to some degree and to offset the health costs associated with use of these products. Fast food taxes have also been implemented in some locations and proposed in many more. Even “fat taxes” on high fat foods have been discussed.

In what some would consider even more extreme measures, taxation of obese people themselves has also been proposed. Many wish to push the cost of obesity to those with the condition. The chief executive of Cleveland Clinic, a heart surgeon, is unapologetic regarding his support of not hiring those who are obese to work at the clinic. Many airlines ask obese patients to buy a ticket for a second seat if they are too large to fit in one seat. In January 2011, the state of Alabama will begin charging employees who are obese an extra $25 dollars per month in health insurance. It is already becoming increasingly expensive to be obese.

In a step beyond curbing behavior solely with taxation, some cities have implemented or are considering bans on fast food restaurants to try to protect the public from themselves. In 2008, Los Angeles City Council banned expansion and addition of new fast food restaurants in an attempt to change public behavior with respect to fast food. Watching this, New York lawmakers are also entertaining the possibility of such a tax.

Unfortunately, researchers from RAND Corporation, a nonprofit research organization, following the ban in Los Angeles are not hopeful that the ban will change people’s diets. Their findings suggest that problems with obesity are more associated with “discretionary” calorie consumption in the form of snacks than they are fast food meals. The result is that the researchers don’t expect much benefit to come of the ban.

As for taxes, while these so called “sin” taxes may offset some of the health care costs associated with consuming certain products, their effect at reducing consumption is limited since people become accustomed to paying the higher prices for these goods unless the taxes are set at high levels of 20, 30, or 50%. With the introduction of such high taxation levels, the businesses selling the products become strong opponents to the taxes and their lobbying efforts are used to defeat attempts at passing laws activating the taxes.

With so much opposition, a different approach is required by our governments to change unhealthy consumption behaviors. Unlike the case of tobacco, food and beverage producers do make some products that can be considered healthy so it is important to take advantage of this. Instead of taxing fast food, fatty food and sodas, our governments should instead embrace the power of the marketing machines of these food producers. Because public opinion is against taxes and no business wants to collect and manage another tax nor cut into their profits, our governments need to approach these food producers and work with them on the concept of “internal subsidization”.

What “internal subsidization” means is that companies raise the price of one of their products and reduce the price of another by an equivalent amount in order to promote the consumption of one product versus another. In this way, assuming that grilled chicken burgers and deep fried chicken burgers of the same cost sell at the same rate, a ten percent increase in the price of the deep fried chicken burger could allow a 10% percent drop in the price of the grilled chicken burger. The difference in price is then roughly 20% but the food vendor has been in control of the money the whole time and has not been asked to reduce the money they generate.

Most importantly, these businesses have not incurred the extra cost of collecting taxes for the government while at the same time hurting their own sales and being labeled as a producer of unhealthy food.

This same approach could also be used for sodas to reduce consumption of sugar sweetened pop compared to diet or low sugar beverages provided by the same vendor. Rather than provide a tax to the government, the beverage vendors could subsidize their own drinks that meet standards for a healthier product. What is important, however, is that the calorie value and not the type of product is targeted so that the competitive balance in the market is not changed.

The end result of such an approach is that the government only creates the law indicating the calories for which the 10% premium is charged and the level for which a subsidy of another product is granted. The government is happy and able to curb costs because the population is encouraged to eat the healthier foods while businesses are able to implement appropriate programs as they see fit.

Because the obesity epidemic continues to rage and imposes ever increasing health costs, any attempts to fight obesity must be explored as an option to correcting the significant health problem. However, when it comes to enacting such fundamental changes in society, our governments cannot expect to succeed when they are fighting everyone. The politicians need to be more effective at partnering and working with those selling the products in order to have any hope of achieving meaningful change.

Do you think that using price to change consumption behavior is a good idea or there are better ways to solve the obesity epidemic? Share your opinions below or in the health forums.

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