Taxing people into better lives

30/10/2013 § 9 Comments

I’m struggling with sugar and fat taxes. The hope is that we can encourage people to improve their diets by changing relative food prices. We know that in theory we can, and that in practice there seems to be some effect.

But does it make those people better off?

This is purely an economics exercise, not a medical/public health one. So, all the usual assumptions and disclaimers apply.

Assume that someone drinks a lot of soda (technically, sugar-sweetened beverages — SSBs). The consumption contributes to their obesity and puts them at greater risk for diabetes. Let’s just focus on the diabetes angle. What this means is:

soda now > diabetes later.

That is, they prefer having soda now, and are less concerned about diabetes later. Or, rearranged:

soda now – diabetes later > 0.

This presentation emphasises that the pleasure from soda now, even once the diabetes later is taken into account, is net positive.

Now, let’s say that we tax soda so this person stops drinking it:

soda now + tax < diabetes now.

We haven’t made them ‘better off’. We have taken away their pleasure and substituted something less valuable.

There are essentially three ways that this might be an improvement:

  • information problem — they didn’t know how bad diabetes would be when they drank the soda, so the tax keeps them from the negative experience
  • time-inconsistent preferences — the future self would have wanted the past self to abstain
  • externalities — diabetes imposes costs on everyone else, so the person isn’t facing the true costs.

This third option is interesting. Let’s say I am poor. My consumption is generally constrained by my budget. The one area where this isn’t true is public goods — botanical gardens, beaches, education and healthcare. If I contract diabetes, I expand my use of healthcare beyond my own budget constraint. By drinking soda now and contracting diabetes, I am actually consuming outside my budget constraint. On the other hand, stopping people from drinking soda and thereby stopping them from contracting diabetes is pushing them back inside (or closer to) their budget constraint. Therefore, the policy makes them poorer.

Yes, I understand that it makes them healthier. I’m just not sure that it makes them ‘better off’.

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§ 9 Responses to Taxing people into better lives

  • Chris Parker says:

    I think the first option is interesting, given we at home quite enjoy watching Jamie Oliver’s ‘Food Revolution’ TV programme. Many people are ignorant of the harm they’re causing themselves, because they’re not educated on diet either by their families or by their schools. The ideal solution then isn’t to tax, but to educate. (Jamie made the kids that ate chocolate bars wear heavy packs to simulate how fat they’d be in future, and to run around the track 20 times to burn it off — fantastic!)

    • I do wonder how much education changes things. I do drink less soda because I’m avoiding future diabetes — I know the issues and that affects my actions. But, what if other people’s consumption is rational? What if they look at their family history, assume they have a low life expectancy, and calculate that future diabetes isn’t that much of a burden?

  • Grant Taylor says:

    This is a very valid argument, Bill, that seems to elude public health thinkers. My guess is that they, like most health professionals or anyone else with specialist knowledge (even economists), have trouble holding on to the idea that others (people without that specialist knowledge and the enculturation that usually comes bundled with it) have different ways of ascertaining value (‘better off-ness’). Ultimately, it is the individual’s perception of net value that drives their behaviour, as I have argued elsewhere. An extreme example can be found in suicidality, where the person has discounted all future life experiences against current pain, as if the only value that is possible is escape from that pain (this oversimplifies the complex motivations of people who wish to end their own lives, I accept). Others usually see this rather differently and the person themselves may have a different view hours, days or weeks afterwards, should they somehow survive. Which raises the complication of the dynamic nature of value attribution . . .

    • Wow, Grant — from soda to suicide. But it’s an interesting problem to think about. How do people feel after being convinced not to commit suicide? At what point at they happy that they didn’t? That would be an example of time-varying preferences.

      This is also the real value of the idea of individual optimisation. It’s the economist’s handy way of remembering that people are doing the best for themselves that they can.

      • Grant Taylor says:

        an example of time-varying preferences
        Indeed. In my experience, many are grateful that they were unsuccessful, although not always at first. Others remain ambivalent and their will to live/die fluctuates, sometimes quite rapidly and unpredictably. Yes, soda and suicide do seem at first to be incongruous – but the potential pain of the diabetes that you associate with soda, perhaps not so much. Or is ‘diabetes’ a spectral demon that you just want to avoid without having to think too hard about what it would actually mean to have diabetes? And off we go down the rabbit-hole of beliefs and expectations once again.

  • Grant Taylor says:

    Erratum: I seem to have messed up the hyperlink in my comment above – just click on my name, if you are interested in following that through.

  • I started writing before reading today. I see that Seamus has a challenging question on the welfare economics of substitution versus income effects:
    http://offsettingbehaviour.blogspot.co.nz/2013/10/paternalistic-income-taxes.html

  • Marcie A Rosenzweig says:

    A tangential argument was brought forth by Fareed Zacharia on his program this Sunday. Zachara reported on an experiment that measured how much a group people were willing to change to get a reward. The results were astonishing but predictable. If people were individually rewarded monetarily right away, they would make the change and support the group in doing so. The numbers willing to make the change dropped as the reward was delayed. the numbers went to zero when the reward was not monetary and benefitted future generations. Nature article here: http://www.nature.com/nclimate/journal/vaop/ncurrent/full/nclimate2024.html
    Zacharia’s piece here:
    http://globalpublicsquare.blogs.cnn.com/2013/10/26/why-world-cant-agree-over-climate-change/

    Delaying small pleasures today, especially when times are bleak, seems like overwhelming deprivation especially when larger pleasures are out of reach and the future is cloudy.

    Taxes must be fairly punitive to change a behavior and will necessarily fall on the less well off if you are talking about food and healthy behaviors. Look at the track record of tobacco taxes in the US.

    Perhaps there are incentives rather than disincentives that would change behaviors faster. Perhaps if taxes are imposed, those monies should be set aside in trust to treat the future health problems rather than going into a general fund somewhere.

    • Thanks for the links! I looked at the CNN one. One thing I wondered about was the participants’ trust in the experiment. It’s easy to say you’ll plant trees, but will you actually do it?

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