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?