Why the “Being Fat” Tax Wont Work

October 10th, 2011

Freakonomics breaks down much more eloquently than I could why this fat tax is an idiotic idea.

First, a fat tax is regressive. That the surfeit of cheap, nutritionally bankrupt calories principally imperils the poor is a popular refrain among health and nutrition advocates. Low-income households are more likely than wealthy cohorts to eat fatty fast food and to have less access to fresh, healthy food. A fat tax, then, hits the poor harder than it does the rich, who can better afford the “good” unsaturated fats and avoid the “bad” saturated and trans fats. Given that the U.S. economy is still struggling in the worst economic downturn since the Great Depression, now would seem an inopportune time to impose an additional burden on the poor.

Second, a fat tax is inefficient. It achieves incremental improvements in health outcomes at a greater cost than other policies. Like taxes on sodas, candy and chips, and like mandatory calorie labeling laws, a fat tax is an indirect mechanism for reducing obesity-related health care costs. Rather than taxing the outcome that causes the problem directly, as demanded by economic efficiency, it instead taxes an input into the production of health outcomes.

Taxing the input allows substitutions among other inputs in the production function that impose costs and undermine the impact of the tax. For instance, if we tax saturated fats, people may eat less fatty junk food like ice cream, but more sugary food like candy. Or they may reduce consumption of saturated fats but also reduce exercise (as this study from the Journal of Political Economy suggests). Both substitutions make consumers worse off as they deviate from their preferred consumption bundle and potentially yield no benefit to society from reduced obesity costs. Thus, an efficient policy taxes being fat, not eating fat.

Finally, Denmark’s fat tax is poorly targeted. It punishes those who won the genetic lottery and can seemingly eat whatever they want without serious consequence to their health. It also punishes those who, by virtue of their work or their devotion to the treadmill, burn enough calories to afford junk food. The dis-utility borne by these individuals contributes to the costs of the fat tax and yields no benefits to society.

If policymakers were serious about implementing efficient obesity policy, they would have to tax being fat, noteating fat, by charging individuals for each “overweight” pound they’re carrying. It’s an idea so repugnant that even the most heartless economist surely wouldn’t endorse it. In fact, it’s so politically incorrect that perhaps only the folks at British airline Ryanair could embrace it. (In 2009, they floated the idea of a passenger-weight-based fee and have also broached such taboo topics in the airline industry as fees for use of airplane lavatories and cheap tickets for standing-room-only airplane cabins.)