Public Finance by Qichao Sun and Jinglu Shao

Public Finance by Qichao Sun and Jinglu Shao

Proposal for “sat-fat tax”

Overview

Recently, Denish ever first sat-fat tax arouses worldwide concerns and debates. The tax -- 16 Danish kroner per kilogram of saturated fat in a food – works out to about $6.27 per pound of saturated fat. It hits all foods with a saturated fat content above 2.3 percent[1]. Danish government carried out this policy simply to reduce the obesity rate and lift the national average life expectancy.

While obesity rate[2] in Denmark is 9.5%, ranking twenty-second[3] among twenty-nine countries, one in U.S reaches 30.6%, topping the list. When we walk around the street, it’s not hard to spot overweight people. Whatever from statistics or daily street scene, we h
ardly can deny the fact that the obesity in U.S. is far more severe that in Denmark. Seemingly, U.S. should levy a even harsher tax on sat-fat food, since obesity has led to many fatal chronic health problem, like heart disease, diabetes. However, the negative effect of obesity is not such a strong reason for government to intervene directly since rational people can decide whether to enjoy something that may bring damage to them. More, many people question whether sat-fat is utterly responsible for obesity.

There are two main categories of reasons for government to intervene. One is externality and the other is imperfect internality. Externality means that what people decide to do will have effect on other people. Imperfect Internality assumes that sometimes human are not rational as supposed so it will be a good idea for government to intervene to help people maximize their utilities. And we can find both in the issue of obesity.

First Reason to intervene: Externality

Increased Health Costs from Obesity

By one report, obesity in the United States now carries the hefty price tag of $147 billion per year in direct medical costs, just over 9 percent of all medical spending. For the existence of market failure of insurance companies that they can’t actuarially adjust for obesity perfectly, people will pay a higher premium for higher cost caused by diseases associated with obesity. On the other hand, people who receive from the government do not pay higher premiums if they are obese. Therefore, no matter people who are not obese receiving private insurance or public insurance need to pay more for obese people increase the total health cost.

Decreased Labor Productivity

A paper in the Journal of Occupational and Environmental Medicine said that employees who are moderately to extremely obese have reduced productivity on the job, even compared to overweight or mildly obese workers. People with low productivity are inclined to get lower wages and get subsidies from government, nevertheless, citizens won’t pay a higher tax for the social security for they are heavier than others. Thus, there is a negative externality of obesity because of a rise in the social security.

Second Reason to intervene: Imperfect Internality

Obesity in Children and Teens

Many people become obese when they are children and teens. This phenomenon gives a reason for government to intervene because humans are incapable of rational decision making when they are too young. For the sake of these children and teens, government should do something to help them far away obesity.

Unhealthy Modern Lifestyle

More and more are working in offices than in factories, which mean less and less physical work is required in modern society. Even for those having jobs in factories, many advanced machines can help them from dirty and heavy work. Consequently, modern lifestyle makes people lack of exercise compared to several decades before. That may be the main reason for the rise of obesity rate in US and it’s difficult for people to abandon the modern lifestyle.

Responses from individuals and firms

To start analyzing the responses of consumers, we first should figure out where saturated fat lies. They are artificially added into fried, coated and processed food. To name it, hamburgers, fries, butter, cream, on and forth. Naturally, they are in some nutritious food, including milk, yogurt, cheese, beef and pork. The most straightforward outcome of sat-fat tax is price rise in both junk food and essential nutritious food. The food manufacturers obviously exert a negative production externality. They unintentionally worsen the health condition of consumers, for which they absolutely won’t be charged. The social marginal cost (SMC) should be above the private marginal cost (PMC). The different between SMC and PMC is the marginal damage showing the side effect on consumers’ health. Since the consumption of sat-fat food has no direct impact on others, private marginal benefit (PMB) equals the social marginal benefit (SMB).

Nevertheless, consumers’ feedback on tax differs with reference to their utility functions and budget constraints. That is to say, they have different private marginal benefits which indicate the sum of individual willingness to pay. In our analysis, they are categorized into two groups, price-sensitive and price-neutral. Price sensitive consumers include low-income families with tight budget constraint and those weighing health over taste. The other group refers to food gourmets.

In Graph A, consumers sensitive to price change have a flatter Demand curve, painted in red line, and thus reflects vigorously to sat-fat tax. The difference between the PMC2 and PMC1 is the marginal damage of saturated fat. That is the amount for sat-fat tax. A tax of marginal damage increases the firm’s private marginal cost curve from PMC1 to PMC2, since it acts as another input cost for the food producers. The quantity produced falls from Q1 to Q2, the socially optimal level of production. On the consumers’ side, they tend to buy less sat-fat food, both junk food and nutritious food like dairy products. Consequently, dairy product manufacturers may invest more on R&D section to promote more low-fat and fat-free food.

On the contrary, consumers who embrace inelasticity of demand relative to

price have a steep Demand curve (PMB’) . They tend to stick to the former food choices.

Comparing the two cases, we can conclude that the price sensitive consumers will breed more overproduction.

On the other side, the firms will delve for approaches to reduce fat contents. More fat-free and reduced-fat food will be on the list of their R&D project, which counts as their main body of marginal cost in fat reduction. More, food suppliers pay more attention to nutrition fact label. Ponder more deeply, we can see a potential negative production externality resulting from namely low-fat food. Supervision from USDA is absolutely necessary.

Seeking for Alternatives

Many people doubt on the tax approach. The research on “fat taxes” is sparse, but there’s good reason to be skeptical about the potential public health gains.

Option One: Taxation

On a regular basis, price regulation through a corrective tax is the first idea to solve the externality of sat-fat. Referring to Denmark policy, the government levies on the percentage of sat-fat. Taking into consideration individuals’ lack of self-control and obstinateness to eating behaviors, tax should be abundantly high to change patterns.

Brownell and Tom Frieden, now director of the Centers for Disease Control and Prevention, wrote in a 2009 New England Journal of Medicine article that the 5 percent taxes on unhealthy foods that states tend to pass just don’t cut it.

In reducing fat consumption, the bar may prove to be even higher since fat is an unavoidable nutrient in our daily meal. A 2007 study form the Forum for Health Economics and Policy modeled the impact of a 10 percent fat tax on dairy products and found unimpressive results.

Such a tax results in less than a 1 percent reduction in average fat consumption, the authors found. They estimate that to have a substantial effect, the tax rate would have to be a 50 percent tax only lowers fat intake by 3 percent.

Moreover, the problem with taxation is the concern that the regressive tax hits lower-income families much harder than higher earners. Lower-income families spend disproportionately higher percentages of their income on food, and usually on more prepared foods. This means lower-income families will be paying more for their food, as a percentage of their total income, than higher-income families. Accordingly, the welfare loss to a family earning $20,000 is nearly double that of a family earning $100,000. [4]

Option Two: Subsidy on healthy food

Some people argue that tax on saturated fat food will not efficiently reduce the obesity rate in U.S, if healthy food is not sufficiently cheaper than taxed fat food. To make it more efficient, government should also give bonus to healthy choices, by subsidizing the fat-reduction producers.

Option Three: Premiums on health records

Price-neutral consumers may have an impact on rising health care cost, taking healthy people’s medical care resources. Concerning with negative consumption externality by consumers’ perseverance to sat-fat, government can encourage them to make a change by offering premiums on every improvement on their health records.

Option Four: Limitation on sat-fat percentage

Food choice is consumers’ natural right; government has no position to totally get rid of junk food from consumers’ daily diet. They’re not supposed to intervene with their plate display. However, government can set a quantity regulation at the very beginning of food process, manufacturers. That is, they are only permitted to produce food with a limit of sat-fat.

Option Five: Investment on community wellness center

Obesity is not completely caused by sat-fat food, but a unlimited consumption of it, as mentioned before, an imperfect internality. More, unhealthy life style is also a determinant factor in appallingly high obesity rate in U.S, and therefore they intake more calories than they consume, which eventually leads to obesity. If dwellers have easy access to physical exercise facility, they have more reasons to keep fit.

[1] Sarah Kliff “Will a fat tax makes Denmark healthier?” . Retrieved October 14, 2011, from

http://www.washingtonpost.com/blogs/ezra-klein/post/will-a-fat-tax-make-denmark-healthier/2011/10/04/gIQA3D5nKL_blog.html

[2] Percentage of total population who have a BMI (body mass index) greater than 30 Kg/sq.meters

[3] Data resource: http://www.nationmaster.com/country

[4] Sarah Kliff “Will a fat tax makes Denmark healthier?” . Retrieved October 14, 2011, from

http://www.washingtonpost.com/blogs/ezra-klein/post/will-a-fat-tax-make-denmark-healthier/2011/10/04/gIQA3D5nKL_blog.html