Obesity Tax? Creating external costs out of not-so-thin air?
I’m confused…
First, read the article, a comment from the democratic governor of New York. In the article, the Governor opines that he is favor of a tax on sugary beverages (think Coke and Pepsi). His argument is feeding Coke to kids makes them more likely to be obese. And this obesity leads to bad health outcomes on down the line. Thus, the tax on soda is called an “obesity” tax, perhaps by journalists and policy wonks that want to make it sound sexier. And just to be clear, I don’t thing the Governor is making a fiscal argument, but it is in the conversation.
In reading this article, I first thought I might have just something of a mild economic epiphany. But then as I kept writing, I’m only more confused. Perhaps you all can help me out?
First, some background on the economic arguments for taxation. There are (at least) two economic arguments for taxation.
The first is to raise revenue to fund legitimate governmental projects. Economists generally believe that the best goods to tax for this purpose are goods with inelastic demand curves (or inelastic supply curves). The idea is that with an inelastic demand curve, the tax can be absorbed with a relatively small change in quantity consumed and produced, resulting in the largest amount of tax revenue with the least amount of distortion or dead weight loss. This argument would explain why we might consider putting relatively high taxes on gasoline, liquor, and cigarettes. These goods tend to be inelastically demanded because there are few substitutes for these products.
Interestingly enough, its seems the demand for soda is not inelastic — actually quite elastic — anyone with a D or better in Econ 211 should be able to calculate if from the article. The elasticity shouldn’t be too shocking due to the fact that there are many alternative to sodas (water, juice, tea, kool-aid, beer, etc.). So if I am looking for a justification of this obesity tax, I have to keep looking…
The second reason to tax goods is to reduce the amount of some activity that generates what economist call “externalities”, or more precisely “external costs”. If person A does something, and person B is harmed, we say person A has generated an external cost. We call it an external costs because person B was external to the decision making — they are a victim so to speak.
Because in most situations, person A doesn’t have to pay for the harm caused on person B, there is too much of the activity pursued. As an example, think of smoking. It shouldn’t be too hard to figure out how person B is harmed (second-hand smoke). If we were to tax activity A, person A will do less of that activity, person B will suffer less harm, and we can get back to the optimal amount of that activity. (People who got a C in Econ 211 will also remember you could regulate smoking, say prohibiting it in certain places). In fact, the right sized tax is equal to the amount of suffering caused by 3rd parties. If the right size tax is imposed, the decision maker now truly faces the “full” cost of their actions, and the “problem” is “solved”.
While most people wouldn’t look at in quite the same way, many laws can be interpreted in the lens of external costs. If person A is, say Vince Marinello, and person B is his wife, and the activity that Vince engages in is killing his wife, the external cost is astronomical. While again it would take an odd person (such as me) to think of a prison sentence as a tax — it really is — you commit a murder and you have to pay, big time. They even take away your hair piece.
Ok, back to the obesity tax. We can’t justify it on revenue grounds…but can we justify it on the grounds of obesity causing external costs? Are there external costs associated with obesity?
Suppose I (at the writing about 6′4″ and maybe 175 pounds – make that 176 as I just had a 20 oz Coke), decide to slurp Crisco through a straw until I weigh 450 pounds. Are there external costs? Who else suffers as a result of my newfound obesity?
Nobody…right? Unless…I’ll get to the unless in a second. So there shouldn’t be a tax on obesity?
Is not being obese then just like, say, playing golf? Playing poker? Watching reality TV? It seems patently absurd that the government should tax golfers, tax reality TV, or tax gamblers (oops, scratch that last one – a post for another day). Is the governor wrong?
And finally to my almost epiphany.
Does the answer to external cost question about obesity change if we live in a world where the government has decided to pay for health care (or at least a faction of health care), and pays for it through taxing its citizenry?
I think it does. When I do the Crisco thing, your future tax bill rises due to my government funded health care expenditures, perhaps to pay for my hypertension pills.
My almost epiphany…
First the government decides to provide a service, paying for it by taxing — and then given that decision, it now makes economic sense to have further government intervention (taxes) to reduce the amount of money spent on the original service.
First, it is weird how government intervention in the first place leads to more government intervention as a result, no? The amount of invasiveness in our lives as a result of provided heath care to people is, in the end, much more ranging that simply providing health care to people, right?
Second, where does it stop? Say we were to change to a 100% inclusive government provided health care system, financed by taxes. In that world, wouldn’t any activity that might potentially increase the amount of spending on health care create an external cost? And thus, shouldn’t it too be taxed? Where does it end? A Soda tax? A chocolate cake tax? A pepperoni pizza tax? A rock-climbing tax? A failure to exercise tax? A pregnancy tax?
–CT
December 18th, 2008 at 9:46 pm
Love to hear the economic argument – takes me back to graduate school days!
Regarding the tax, though, your argument fell apart at the point you started going down the “government funded healthcare” path. You and I are both affected today by the effect of the lifestyle choices of the masses. Why? Because our employer sponsored health insurance costs are affected. Why do you think that insurance companies have what’s called “community rating” for insurance premiums? It’s because the aggregate morbidity in various geographic regions has a significant effect on the actuarily (sp?) estimated cost of providing health insurance coverage to people in that geographic region. Live in an area where the aggregate morbidity is low and you’ll have lower health insurance costs. Live in an area that has alot of unhealthy people and you’re going to pay more for health insurance regardless of the state of your own personal health.
But take health insurance out of the equation for a minute, because frankly, it’s a red herring in the real ecomonic analysis here. Think about the other tangible and intangible costs associated with disease. The aggregate effect of disease (sometimes referred to in wellness circles as “dis-ease”) touches every aspect of life as we know it. How about something as simple as a middle aged man having a heart attack while his kids are still financially dependent on him? He survived the heart attack, but now has so much damage to his heart muscle, he’s no longer able to work. He’s eligible for social security disability (hmmm….there his choices are impacting my tax dollars), but his wife now needs to leave her job that requires frequent business travel, because he’s in and out of the hospital so much, she needs a job (now lesser pay, too) that will afford her the ability to be home every night — and one that’s close enough to home that she can drop everything to take him to the ER when the congestive heart failure in this 49 year old man flairs up again. Between the loss of his executive income and the reduction in her salary to work closer to home, they now have less disposable income. Since there are more families just like this one in this community, and because of the economic impact their diseases have had on the aggregate disposable income of the community, the reduction in spending had resulted in dozens of layoffs from retail businesses in the area.
And by the way, Mr HeartAttack’s 2 oldest children -”the twins” – are graduating from high school this year and are hoping to be able to go to college. However, because of the hit dad’s illness has made in the family’s income, both kids have been working part time jobs 15-20 hours per week for the past year in order to be able to afford to go to Homecoming, Prom and other typical high school activities. Working that many hours meant less time for studying – and while both may have been eligible for academic scholarships before dad’s illness, the grades have slipped a bit to the point that academic scholarship money isn’t a likely option any more. The family completes the FAFSA form – and lucky for them, their reduced income and the fact that two kids are going to college next year makes them eligible for Pell Grant monies (oops, there’s dad’s illness impacting my tax dollars again!). So in just this ONE disease in this one individual, you can see the resulting “butterfly effect”, can’t you?
Is a “sin tax” on non-diet beverages the solution to preventing disease? Not by itself, but it’s a step in the right direction. I’ve been advocating the same concept to anyone who will listen for the past couple of years now (and I’m a Republican!) But my recommendation was to tax the snot out of the unhealthy alternatives to non-diet soda too, making the only beverages left that aren’t heavily taxed that ones that are either healthy or have a neutral affect on your overall health (this regarding your “elasticity” argument). That also means taxing the snot out of the bag of sugar that you can use to mix up your own pitcher of KoolAid or homemade lemonade too.
And I didn’t stop with just the sugary products. That Crisco you mention? Even if it didn’t make you gain a single ounce, the fact that it’s a trans-fat in my proposal means that it gets a hefty “sin tax” applied to. Why? Because even if you don’t gain an ounce, those transfats are like sludge in your arteries. You can stay a skinny beanpole while consuming that Crisco, but the fact is that consumption of transfats means that you’re heading for a heart attack yourself. One that if you survive, your heart could very likely be just like the 49 year old I described above. And if that happens, you’re affecting my taxes, the cost of health insurance coverage in my community. You’re affecting the employment of individuals in your communities whose livelihood depended on people like you purchasing their goods and services. Therefore that Crisco you want to chomp on is going to come with a really hefty sin tax too with the idea that maybe you’ll give some serious consideration to consuming carrot sticks dipping in a heart heathy yougurt based ranch dip when the munchies hit instead (again, the elasticity argument, but one where the only reasonable choices, from a financial perspective, are ones that don’t have a causal relationship with the development of disease.
By the way, those hypertension pills you had to take for the high blood pressure you’ve developed (along side the heart disease that’s silently progressing)? They make you tired, so you’re not as productive at work any more (now your choice to eat Crisco resulted in developing a disease whose treatment is now affecting your coworkers and your employer). Those pills have also affected your “libido” (let’s just leave it at that!), which has resulted in a strain in your relationship with your wife. Since you and your wife aren’t as close as you once were, you’re doing less together as a family. Your kids have a vauge recollection of when Dad could keep up with them on the annual family ski trip, but now it seems like all you want to do when you come home from work is sit on the couch and watch TV. Your youngest son – the one who is too young to remember the “good old days”, but worships the ground you walk on – is observing your interactions (or lack there of) with the family, thinking that this is how he’s going to do things when he’s married with a family of his own. So 15 years from now, he sits in the recliner every night after work, not playing with his kids (the way you did with your older kids BD – before disease) because he’s too young to remember the positive role model his rather used to be before the disease (and the side effects of the medication taken to manage the disease) robbed you of your ability to be the kind of father you always wanted to be. And as a result, his kids (your grandkids) grow up with a distorted sense of what a father’s role in their children’s lives should be.
And so the negative effect of your individual choice to eat Crisco continues to spread and multiply.
It’s not about you and what you want to do. The tangible and intangible cost of our unhealthy or disease-producing choices affects everyone around us too.
December 18th, 2008 at 11:11 pm
Question: If we find that diet soda with nutra-sweet is actually a cancer causing agent, and we’ve been taxed into drinking diet soda, can we sue the state for forcing us in that direction by their taxation? I mean, should the state take out mal-tax-practice insurance? God I miss the days we could make decisions ourselves. We know sugary drinks are bad for us, isn’t it our freedom of choice to drink them. If the government doesn’t like it then they can go ahead and make it illegal, like pot.
December 19th, 2008 at 12:44 am
Wait, are water, tea, and juice really substitute goods for soda? (kool-aid would be taxed, I’m pretty sure, since he talks about “sugared beverages”).
February 3rd, 2009 at 4:32 pm
Joan,
First off, thank you for the clearly well-thought and lengthy comment. It is nice to know that people are reading our occasional offerings. I hope my response isn’t so dated that you’ll miss it.
Before I get started, I think my focus may be a bit different from yours. My attempted point was less about sugary beverages and the costs of disease than it is about the scope of government and government interventions.
But I must start with a concession to you. You are right about your major point – so long as my insurance premiums are based on any group, then the costs of my actions do impose externalities on others – the other members of my group. I should have noted that as long as the government pays just 1% of health care (or if my premiums are based on group statistics), there would be an argument for taxing activities that lead to higher health care expenditures. And to that end – the 100% government sponsored healthcare may be a bit of a red-herring. But as I’ll explain, maybe not entirely…
However, there are still two things I’d like to point out that I think speak to the spirit of my post.
First, the *larger* the fraction of health care that is paid by government (holding the number of covered persons constant), the *larger* the “external” cost imposed on other taxpayers when I engage in unhealthy activity. For example, if my slurping Crisco leads to a $1,000,000 increase in health care expenditures when the government is covering 100% of my health care costs, this exposes other tax payers to $1,000,000 in external costs. If Uncle Sam is paying 10% of my health care costs, this exposes other tax payers to only $100,000 in external costs. Admittedly, in each case, an argument for taxation exists. However, I’d suggest that government is more likely to step in the former, and/or is likely to be more invasive. Of course, I am focusing on the directly monetary costs (vs. the indirect costs you described in detail in your comment) and leaving aside any considerations on the number of persons covered.
Second, and again, while your point on groups is well taken, an important difference between my decisions affecting premiums of my coworkers on the one hand or expenditures of all tax-payers on the other hand is that the government has the power to compel people to take action. The governor of NY can take action to make it more costly for me to drink soda. My employer can remove the soda machines from my workplace, but can’t truly dramatically increase the costs of drinking soda (I have a fridge in my office).
Again, your point is still taken, but bear in mind my focus on how government intervention leads to more. Let me try to state that a different way — if we went from a world with perfect actuarial rating for each individual person based on every behavior (Crisco, exercise, etc.) to one based on group (employer?) statistics, there would be no additional invasiveness in our lives – this is because our insurance company can’t compel us to take actions (well, at least pre-treatment). It wouldn’t be as fair, but government wouldn’t be that much more involved in my life. But if we went from there to 1% or 100% government sponsored health care, it would.
I believe we’re on the same “team” – we are both talking about the “disconnect” between the monetary costs of an action and the “full costs” of an action. I think we might agree on this.
If the insurance companies had this perfect information about me, they could choose to charge me a price of insurance that accurately reflects my risk. This would increase the cost to me of drinking soda and eating Crisco. So too would your suggestion of taxing the crap out of sugar. In econ speak – taxing is an attempt to make people bear the “full costs” of their actions. So too would be acquiring additional information about my eating habits and letting the insurance market adjust prices accordingly. On that much, I bet we agree.
As someone who is a healthy eater (I would assume), wouldn’t you love to credibly communicate that information to your health-care provider? As someone who is a less healthy eater, my raging insurance premiums may do the same trick. But at least I have that choice with the raging premiums – which is something I (and you?) might prefer to outright prohibition.
(As an aside, I’m sure we share a fascination with the very much related issue of what effect genetic testing might have on the health care industry. A post, no a series of books, for another day.)
My main (attempted) point was simply a prediction – that if we move toward additional government financed health care, we’ll likely see more of these types of “suggestions” by lawmakers. One leads to the other.
I consider myself someone who is fairly fervently anti-government intervention, but I do see exceptions to the rules (external costs and a few others scattered around our blog). Please don’t think that I don’t understand disease is costly, nor think that I don’t understand that the decisions of one family member regarding their health certainly have impacts on other members of that family member. For example, someday I’d like to post why I think driving and having babies should have something in common – a license – but let me get tenure before posting that one!
Thanks again for the comment.
–CT