Should We Tax Fat?

There may be an argument for taxing fat; but there is no argument for taxing foods that fat people might eat.

I shouldn’t even have to make this observation. But as I have pointed out before, when people start thinking about health policy, their IQs fall about 15 points. In what follows, put on your economics thinking cap and I will walk you through the analysis.

If I become obese, does that create costs for you? In a rational world it wouldn’t. At the time I purchase health insurance, I would be charged an extra premium if my obesity created above-average expected health care costs. Or if I became obese after acquiring insurance, my insurer would charge me more because of that fact. Unfortunately, misguided regulations prevent premiums from reflecting real health care risks.

Three bad things happen as a result. First, if I don’t pay a premium that reflects the full cost of my obesity, you and others will have to pay a higher premium (or higher taxes) to make up for my inadequate contribution. In economic terms, if I don’t pay the full social cost of my behavior, I will be shifting cost to others. In this way, unwise regulation creates the economist’s classic “externality.” My overeating creates external costs for others.

Second, because I am not paying the full social cost of my own behavior I will be encouraged (financially) to become even more obese than I otherwise would be. This is a straightforward application of the law of demand. If we artificially lower the cost of obesity, there will be more of it.

Finally, because we have created a world in which health insurance premiums are artificially too high or too low for almost everyone, people will face perverse incentives in the market for insurance. Because I am undercharged, I will over-insure, purchasing more insurance than I otherwise would. Because you are overcharged, you will under-insure, purchasing less insurance than you otherwise would. In the end, we will all have non-optimal insurance coverage.

All of me,
Why not take all of me?

Now let’s stop and take stock. What we have here is a pattern that is repeated over and over again in health policy. Unwise intervention creates a social problem. Instead of undoing the source of the problem, we construct a new intervention. The new intervention, in turn, causes more problems, etc., etc.

Still, let’s assume for the moment that society is unwilling to let health insurers price risk accurately — for whatever reason. What’s the second best solution?

In a world in which my obesity creates external costs (higher premiums) for others, there is a straightforward way of “internalizing that externality,” to use another economic term. We can tax fat. The proceeds of the tax could be used to subsidize health care resources that obese patients tend to over-use. Or we could subsidize health insurance pools that attract a disproportionate number of obese enrollees.

How would that work? Actually, the new health reform legislation (ObamaCare) makes that rather easy. Under the law, every patient is supposed to have an electronic medical record. And one of the pieces of information that is supposed to be on that record is a BMI (body mass index) number. So in principle, the IRS could match up everyone’s tax return with his BMI and impose a “fat tax” wherever appropriate. If we wanted to home in and make the tax even more optimal, we could combine the BMI measure with other health indicators. If someone has a health problem that is exacerbated by obesity (say, diabetes), the tax could be even higher.

There is also a less intrusive way to impose a fat tax. The IRS could impose the tax on everybody. Then non-obese taxpayers could escape the tax by attaching proof of a low BMI to their tax returns.

Mind you, I am not advocating any of this. I am merely pointing out that there are simple and direct “second best” ways of dealing with the external costs of obesity, if we are absolutely opposed to first best solutions.

What is absolutely not justified is a tax on foods that obese people might eat.

For one thing, such a tax is unfair. My secretary eats junk food and wears size zero dresses. Why should she have to pay more for lunch, because an obese person might eat the same type of food?

Second, like other excise levies, the tax would be regressive — taking more of the income of low-income families than of high-income families.

Third, the costs of such a policy almost surely outweigh the benefits. Everyone would be made worse off in his role as a consumer so that the social costs of obesity can be reduced by…how much? (See one study here.)

Finally, it makes the mistake of taxing inputs not outputs. It would be like rewarding students for the number of hours they study (or penalizing them for not studying enough) instead of basing rewards and penalties on what they did or did not learn.

You can understand why politicians do not always do rational things. Political pressure stands in the way. But how do you explain an independent “think tank” making these same mental errors?

A report from the Institute of Medicine recommends that federal, state, and local governments increase prices on sugary foods, spearhead a marketing campaign to dissuade Americans from eating sugary foods, monitor the weight of pregnant women, implement new exercise requirements for children in school and daycare, and create a “food literacy” program for schools. Here is a brief summary of IOM recommendations from the Heartland Institute’s Amanda Carpenter:

  • “[R]educe unhealthy food and beverage options and substantially increase healthier food and beverage options at affordable competitive prices.” For example, IOM suggested enacting “specific excise taxes on sugar-sweetened beverages” based on the “cents per ounce of liquid, cents per teaspoon of added sugar.”
  • Use “financial incentives” to encourage retailers that serve healthy foods, like supermarkets, and “limit the concentration of unhealthy food vendors,” like fast-food restaurants and convenience stores.
  • Instruct the U.S. Department of Agriculture to begin “exploring the optimal mix of crops and farming methods for meeting the current Dietary Guidelines for Americans.”
  • Develop a social marketing campaign with “carefully targeted, culturally appropriate messages aimed at specific audiences (for example, tweens, new parents, and mothers.)” As a part of this project, IOM said governments should work with “entertainment media” to explore “message placement in popular entertainment, viral and social marketing, and platform advertising—including online, outdoor, radio, television, and print.” The think tank also suggested “encouraging and supporting news media’s coverage of obesity prevention policies through the development of local and national media programs.”
  • Ensure “implementation and monitoring of sequential food literacy and nutrition science education, spanning from grades K-12, based on food and nutrition recommendations in the Dietary Guidelines for Americans.”

As we previous reported in Daily Policy Digest, even cupcakes and bake sales are in the food police cross hairs:

  • Maryland’s Montgomery County has prohibited bake sales entirely.
  • Massachusetts will not only limit the bake sale capability of students, it will also forbid students from handing out sweets such as cupcakes on their birthdays.
  • New York City public schools prohibit students from selling unapproved home-baked goods, but still allow complying processed foods to be distributed (such as Kellogg’s Pop Tarts).

The federal government is expected to weigh in with its own rules soon. The Agriculture Department says the new rules will allow infrequent bake sales during school hours. (Source: BusinessWeek)

And today’s New York Times announces Mayor Bloomberg’s new plan to ban the sale of large sodas and other sugary drinks:

The proposed ban would affect virtually the entire menu of popular sugary drinks found in delis, fast-food franchises and even sports arenas, from energy drinks to pre-sweetened iced teas. The sale of any cup or bottle of sweetened drink larger than 16 fluid ounces — about the size of a medium coffee, and smaller than a common soda bottle — would be prohibited under the first-in-the-nation plan, which could take effect as soon as next March.

Go figure.

Comments (25)

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  1. Studebaker says:

    The implications are obvious: don’t tax fat foods; tax fat people!

  2. David R. Henderson says:

    Good post. BTW, it’s “home in,” not “hone in.”

  3. Greg Scandlen says:

    This all highlights one of the fundamental differences between statists and market people. The statists don’t believe in “prices,” they see only “charges.” A price is the true value of a product or a service as determined by the producer and the buyer. It contains a wealth of information in one little number.

    A charge is the penalty for consumption. The lower the charge (to the buyer), the greater the consumption and vice versa. Society may therefore set the charge according to whatever is benevolent — charge more for bad things, charge less for good things. It is unfair, for example, that the rich and the poor should be charged the same for the same service. ObamaCare has already gone a great distance to ensure income-based charges for health insurance. If insurance premiums are based on income, why not do the same for traffic tickets, bread, housing and any other inescapable service?

  4. Neal W. says:

    Basing the tax off BMI is just as unfair as taxing junk food because your size zero secretary sometimes eats it.

    Some people who are “overweight” by BMI standards are just muscular and have low fat. I’ll be damned if I busted my ass for years in the gym to get the body of a greek god and get taxed extra.

  5. Amber Jones says:

    @David R. Henderson — Thanks, David, for catching that! I’ve corrected the typo.

  6. Chris says:

    BMI is a very poor metric, even the guy who invented it never intended it to be used in the way it is. As Neal stated, it breaks down for taller people (even though it pretends to take height into account) and more athletic or muscular people. You could also have a slightly overweight individual be healthier than a normal weight or underweight individual. I’m sure we’ve all known a skinny person who doesn’t exercise, drinks, smokes, and eats like crap. Sedentary lifestyles are unhealthy.

    Theoretically you could base it on things like waist circumference, fat percentage, heart rate, blood pressure, the results of a stress test, etc. Everything a medical underwriter for an insurance company might do….which just underlines the point that the best thing is just to allow medically underwritten health insurance.

    Also, Mayor Bloomberg is stupid. Banning 16oz+ drinks doesn’t prevent someone from simply ordering two.

    You also have to deal with the fact that really obese people tend to die sooner thus consuming less social resources in retirement, if they even reach retirement. (of course they’re also more prone to go on disability).

    I do of course hate having to pay for other’s poor life choices.

    If you can’t do medically underwritten insurance, the second best solution, is of course high deductible plans with large copays. Increase the cost of having poor health. You might even be able to figure out a way that the deductible and copays for lifestyle related illnesses are higher.

  7. Eric says:

    Neal W. makes a valid point about the limitations of BMI, though I’m sure an alternative measure that correlates better with obesity could be determined. The main problem with John’s “tax the fat” proposal (which I realize he is not sincerely supporting) is that it seems to rely on an assumption that all people who are obese are that way because of their personal choices. It’s the same line of thinking that assumes that all welfare recipients are lazy and want handouts, and therefore we need to cut welfare to teach these people personal responsibility.

    Certainly this probably describes most obese people, but there are possible psychological, genetic, and epigenetic links to obesity (to say nothing about certain medical conditions). Lumping in these people with lazy overeaters punishes them for something out of their control, which seems far more unjust than making John’s skinny secretary pay a little more for her soda. Plus, I think the Bloomberg argument would be that even if your secretary isn’t obese currently, it is still better for her overall health if she drinks less soda.

  8. Paul H. says:

    Excellent post.

  9. Uwe E. Reinhardt says:

    I am reading this on my BB and it gives me only the top fraction of your piece. Perhaps my BB has a soul and takes mercy on me.

    But I can see where you are going with this. Smart people like you and I should not pay taxes on fat because we eat fat smartly.

    Of course, the same should go for liquor. We should not tax liquor, but only people who get drunk.

    Implementing this rational policy has some interesting wrinkles, but it could be done.

    I think this could turn out to be a good read for freshman economics, so I may read the rest of it on my PC.

  10. Eric says:

    Just as a clarification to my earlier point, I am not opposed to a tax scheme that penalizes people who incur higher costs through their own irresponsible behavior. I just want to make sure that we don’t also punish people who may be overweight due to circumstances beyond their control.

  11. Charlie Bond says:

    Hi John,

    This is a great post. First your observation about the correlation between immediate onset of IQ diminishment upon thinking about health policy was revelatory, as I find that I am dumber and dumber the more I ruminate on this stuff.

    Actually the concept of a fat tax is the product of people thinking too much about health policy. They were actually thinking about a flat tax, but too much health policy bored the “l” out of them.

    Seriously, we do need to address obesity as a generational problem with the same vigor we addressed smoking—but not necessarily with the same means. Japan, I am told, has a waist tax (not to be confused with wasted taxes). Citizens pay for every inch over a 36-inch girth (presumably Sumo wrestlers are exempt).

    Safeway is at the forefront of employers trying to incentivize workers to improve overall health indicators, especially obesity. (Funny how their internal policy does not always translate to the grocery shelves, but as corporate citizens they are doing pretty darn good job.) A tax deduction for Employer incentives was a part of the health care reform bill, but Congress—in its infinitesimal wisdom—dropped it at the 11th hour.

    As a result, the Patient-Physician Alliance has created a points system that employers can use. By buying membership for their employees, employers can reward good health habits through a point system that gives employees who take care of themselves points that can be redeemed for significant discounts and other incentives. The better the behavior, the more points. {This is part of PPA’s initiative to introduce the concept of individual responsibility as a cornerstone of health policy, something that is missing in the current scheme.)The employer saves money by buying PPA points which are far less expensive than actual cash incentive payments to the employee. PPA, in turn, helps provide employees with support via communications, a health-buddy system and community activisim to help employees live a more healthy lifestyle individually, while helping each other and their neighbors create a caring community. This is part of how we must learn to take care of ourselves and each other–which is the only way to reform health care from the grassroots up, not the top down.

    Finally, I note that Montgomery County (where I grew up) has again rushed to the fore in the fight against illegal sales of sugary substances. For those wanting a true hoot, try going to UTube and checking out the “Great Lemonade Stand Bust”. I am not sure of the link, but you can find it by googling lemonade stand, Augustine and Montgomery County. The short story is that a couple of enterprising little girls decided to raise money for less fortunate kids, so they set up a lemonade stand right outside the Congressional Country Club, where the PGA was holding the US Open. As people poured out of the tourney, the lemonade stand did a roaring business—until Montgomery County officials showed up and ordered them to shut down and demanded to know who was responsible. At that point, my friend Norm Augustine (former CEO and Chairman of the Board at Lockheed) stepped forward and accepted the citation. Meanwhile, his very astute attorney daughter (and mother of one of the little girls) streamed the whole incident to UTube. It went viral and Montgomery County became a laughing stock—particularly since Norm had just been appointed chairman of a special County commission to encourage entrepreneurial activity in the County. Ultimately, the County waived the fine, but not without providing a marvelously entertaining interlude in comic County antics as government seeks to protect us one and all.

    Cheers,
    Charlie Bond

  12. Earl Grinols says:

    We economists know that efficient intervention targets directly the object of interest. If reducing improper body weight is the objective, then taxing improper body weight is the efficient intervention, not taxing or subsidizing complement goods, substitute goods, etc.

    Such a simple public finance principle should not be hard to explain.

  13. NK says:

    In response to Eric’s posts, with regard to not penalizing people that are obese and it is not their fault. I think the point of the article is not to impose penalties but to actually charge the cost of the service that is being provided, so the increased cost or insurance premiums would/should apply these folks as well. Just the same as they might have to pay more for extra large clothes, because it takes more material and costs more to make them.

  14. Laurence Brody, M. D. says:

    John, another great thinking article.
    I have wondered if there is correlation between food stamp issuance and usage, and obesity.
    It seems that food stamps are for the lower socio-economic group, and that they consume more
    Fast foods and non-nutritive foods
    An interesting research project would be to graph their usage and the incidence of obesity in
    The population. It seems that this could be an easy analysis for NCPA. Wouldn’t it be shocking
    If the two graphs superimposed. Would economic theory say “free food is consumed more?”

    Laurence Brody, M. D.

  15. civisisus says:

    Dunno whether thinking about health policy lowers IQ 15 points; I’ve got my money on the results of reading John Goodman’s musings on health care surpassing the under.

    Especially if commments are counted.

    Wake me when John & you all get comfortable with accurately assessing “wealth creators” like Romney, Blankfein, et al for the “externalities” their behaviors plague us with.

  16. Uwe E. Reinhardt says:

    I am reading this on my BlackBerry and it gives me only the top fraction of your piece. Perhaps my BB has a soul and takes mercy on me.

    But I can see where you are going with this. Smart people like you and I should not pay taxes on fat because we eat fat smartly.

    Of course, the same should go for liquor. We should not tax liquor, but only people who get drunk.

    Implementing this rational policy has some interesting wrinkles, but it could be done.

    I think this could turn out to be a good read for freshman economics, so I may read the rest of it on my PC.

  17. Morris Bryant, MD says:

    For the life of me, I want to know who is it in the IOM that has relatives in the Kremlin? There are NO examples of sustainable vibrant economies that are constructed by a “top down authoritarian” approach. Let’s take bullet #2 that would “limit the concentration of unhealthy food vendors”. What about all the teenagers who get their first job in a fast-food joint? How about the land owners and construction folks who earn their wages building and maintaining these businesses? And the taxes collected from their sales? Without those, we sure won’t be able to make other food and beverage options available at “… affordable competitive prices” will we??!!

    One of my first year medical students got it best when one of her classmates suggested taxing french fries to help cut down on obesity: “What about all the potato farmers? What are they supposed to do?” I guess take their USDA subsidies to not plant potatoes and go buy some sugar limited food and 16 oz drinks while they tour the Statue of Liberty.

    Real life incentives coupled with liberty will clean up most of this mess, if given a chance.

    Great Post and ditto “Testing Without Theory”. Great articles to teach from.

    Other than this, I have no feelings on this subject…..

  18. frank timmins says:

    What goes on in NYC stays in NYC. It is essentially another world with strange beings and a society that does not relate to or understand anyone else in the uncivilized hinterlands.

    John’s post is in some ways a postscript from his previous post regarding statistical bias. He asks how an independent think tank can make mental errors. Perhaps the Institute of Medicine is not making mental errors “in the pursuit of their particular agenda”. The problem is they are not particularly interested in the collateral damage resulting from the implementation of their recommendations.

    It seems that “consideration of the source” should be the watchword in evaluating “recommendations” from any so called experts. Ambitious politicians can do a lot of damage with dubious “expert” analysis. You don’t have to look further than Al Gore for proof of that.

  19. Larry Gagnon says:

    Socialism, you’ve gotta love it.
    Once society burdens itself with the duty to provide heath services, etc., for everyone without requiring the recipient of the service to pay the real cost, freedom is impossible.
    Obese people will likely die earlier than health nuts, possibly saving the social security system from bankruptcy.
    Maybe we should incentivise bulbous bellies.
    Just leaving your house can be risky; I suggest rewarding agoraphobics.

  20. wanda j. jones says:

    Obesity is more than a matter of individuals who eat more calories than they burn. A mind map would show that some people with depression and low self-esteem eat to create a reason to not be social or compete for attention from the opposite sex. External incentives probably would not mean much.

    Then there are those with strong peer ties, as it has been shown (look up in Wired magazine) that cliques tend to imitate the most popular people; if one is fat, all are fat. Fat becomes a peer norm. Taxes will have no effect.

    Perversity is another factor; when something is forbidden, people struggle to get more of it. Remember prohibition? Bootlegged pecan pies crossing state lines and getting hauled over by the fat police!

    Cultural aspects should not be over-looked. In some cultures (Samoan), being fat makes one attractive to the opposite sex. A quip from an immigrant from Africa comes to mind: “I decided I wanted to go to a country where even the poor people are fat.” Being fat in survival terms means you can live longer than another person if you run into difficulty.

    Safety has a role to play; in dangerous urban areas, going outside for play or simple running puts one in the zone of gun play by out of control teens.

    Family eating habits play a very big role; it has been found that people who eat at home consistently, will eat more vegetables and lean proteins than those who consistently graze in the fridge or order in pizza. For many lower class families, the average meal at home happens once a week.

    Achieving a lower weight when one is fat can be very difficult as it entails both habit adjustment and attitude adjustment. And it isn’t as though people do not understand the problem. Just about every day time talk show, even Dr Phil, engages the audience in personal makeovers, from instant to a year of fitness and diet management. So, we trade in our complex set of human motivations and lifestyle for the nanny state, with its silly rules and IRS-style controls and reports.

    Since I am in healthcare, I am in favor to leaving the obesity epidemic to healthcare enterprises, where there is a great deal of entrepreneurship, from lap bands, liposuction, medical weight loss programs, and guided nutrition programs, in addition to Overeaters Anonymous, of the great Twelve Step tradition. With much of our future healthcare industry at risk for much greater under-payment from government programs, among the strategies that providers and health plans can use to minimize their losses is to address the health risks that people have as soon as they are registered with a health plan. If they are seriously obese, there are medical reasons for reducing that risk that can be highly persuasive; diabetes, joint problems, heart disease, hypertension, kidney disease, and foot problems. A health plan offering both incentives and tools could also make use of peer support groups, which are very effective. Keep the d…..government out of it. If insurers are required to take all comers, they should be allowed to take steps to minimize the risks so cavalierly thrown on them.

    A good topic, John…but try not to be caught up in something that is not just an economist’s “thought exercise.”

    Cheers…

    Wanda J. Jones
    President
    New Century Healthcare Institute
    San Francisco

  21. Henry C GrosJean says:

    Why not call it the Twinkie Tax :)

  22. Rob Tenery says:

    John,

    Thank you for sending me your take on the obesity problems. As you have so ably pointed out, the individual is not always held accountable for acts that create burdens on others. If their bad habits continue, the burden shifts to society to either continue to fund these errant lifestyles or pass regulations that may restrict the choices of others—the example is the First Lady’s school lunch program.

    Rob Tenery, MD.

  23. John Seater says:

    Notice that we are NOT in the second best solution but rather at some nth level best. We *could* institute the suggested taxes and subsidies to achieve a second-best solution, but we have not done so. That means we are at a solution inferior to the second-best, i.e., third-best or even worse. Apparently the proposed tax on fatty foods would move us still farther from the social optimum. Magnificent.

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