In the Nation's Interest

The Skinny on the Fat Tax

By Courtney Baird
Research Associate

Obesity Rates Slowing, but Not Enough

According to the Centers for Disease Control and Prevention, 69.1% of American adults age 20 years and over are either overweight or obese.  This percentage has increased steadily over the past three decades, and if the trend continues, the entire adult population will be either overweight or obese within 75 years.  Furthermore, the costs to this crisis aren’t just physical – they’re financial, too.

A report in the Journal of Health Economics notes that America spends a stunning $190 billion per year on obesity related health care – that’s over a fifth of total health care expenditures in the U.S.  These deleterious trends have resulted in policy makers implementing a series of programs over the past decade to educate the public about the importance, and consequences of not, making healthy diet and lifestyle choices.

While the growth rate of obesity has slowed, it has nonetheless continued to rise.  As such, health officials have begun to discuss other policy options for mitigating the obesity epidemic.  One such option is a tax on fatty foods.

The Pig of Pigovian Taxes

A “fat tax” is a type of Pigovian tax – a tax that is levied on legitimate market activity that produces negative consequences for society as a whole.  For example, many countries apply extra taxes to cigarettes in order to reduce the negative health and fiscal consequences resulting from cigarette smoking.  Similarly, a “fat tax” is a tax applied to foods containing a specified level of fat, or a certain kind of fat, in order to reduce health and economic problems produced by the overconsumption of these foods.  In theory, the workings of the fat tax are displayed in the following graph.  After the implementation of the fat tax, the price of the fatty food increases from P0 to Pt.  Subsequently, the fatty food supply curve shifts left, moving the supply and demand equilibrium from E0 to Et.  As a result, the quantity of the fatty food consumed decreases from Q0 to Qt.


 

Proponents for the fat tax argue that fatty foods should be treated like cigarettes and alcohol.  Both vices have considerable negative individual and societal costs, and as such, are heavily taxed in many countries.  When one compares cigarette health care costs to those of obesity, the fat tax argument stands its ground.  America spends $96 billion treating diseases caused by cigarette smoking – far less than the $190 billion spent on obesity.  Additionally, the tax on cigarettes has been quite effective in reducing cigarette consumption, as displayed in the following graph.  In 1970, the average tax per pack of cigarettes was $0.18 and the percentage of adult smokers was about 40%.  By 2011, the average tax per pack was up to $2.35 and only 20% of adults smoked cigarettes.  Increased awareness about the harmful effects of smoking has also contributed to the decrease in cigarette consumption.  

 

Denmark’s Failed Fat Tax

In October 2011, Denmark passed the world’s first fat tax – a tax on butter, milk, cheese, pizza, meat, oil and processed food that contained more than 2.3% saturated fat.  The Danish government implemented this tax in an effort to reduce the population’s consumption of fatty foods, as Denmark’s overweight and obesity rates have steadily increased over the past decade.  According to the Organization for Economic Co-operation and Development, consumers paid a $1.26 per pound tax on saturated fat on domestic and imported food, which equated to up to 30% more for a pack of butter, 8% more for a bag of potato chips, and 7% more for a liter of olive oil.  Saturated fat consumption was expected to decrease by 4%, but, unfortunately, the Danes never reached this goal – in November 2012, the Danish government announced the revocation of the nation’s fat tax.  According to the Institute for Economic Affairs, the outcomes were dismal, to say the least:

     • Inflation rose to 4.7% in Denmark
     • Real wages decreased by 0.8%
     • 10% of the fat tax revenues were lost by increased administrative costs
     • Resulted in the loss of Danish 1,300 jobs
     • Many Danes travelled across the border to Sweden and Germany to purchase groceries, including untaxed fatty foods

Denmark’s Fat Tax Wasn’t Fat Enough

According to Oliver Mytton, a researcher for the British Heart Foundation's Health Promotion Research Group, junk foods need to be taxed at least 20% to have a significant effect on obesity and cardiovascular disease.  Mytton also adds that the resultant tax revenue should be used to subsidize healthy foods in order to guarantee significant health improvements.  Additionally, his studies have found that taxes on a wide range of unhealthy foods and ingredients are more effective than narrow fat taxes.

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