Tax on Junk Food

Abstract

The debate on whether a tax on fattening foods should be put in place has been tossed around and debated for quite some time. Based on what I have read and the different arguments I have focused on, I believe that a higher tax on sugary foods should be put into action while a reduction in taxes would be beneficial for healthier foods. The questions that I will be answering within this paper include the following. How will higher taxes on unhealthy foods affect the economy? Will obesity levels begin to decline with a higher tax on junk food? The effects on the economy include consumption, production, substitution bias, the cost of health care, and the production/introduction of new goods. New ideas could be introduced such as more in-depth food labels, less expensive and healthier options at fast food restaurants, cheaper fresh produce and meats, and more expensive junk food.

Article Summary

This article is titled Waist Banned. It is from The Economist print edition, July 30, 2009. This article’s main topic is over the taxation of unhealthy foods. It presents the argument over whether junk food should be taxed more heavily to prevent consumers from buying them to lower health care costs and obesity rates in the U.S. This tax, as explained in the article, is known as a Pigouvian tax (The Economist Newspaper Limited, 2009). This tax derives its name from Arthur Cecil Pigou, a 20th century economist who taught at Cambridge University and is best known for his contributions to the theory of economic welfare. A Pigouvian tax is any tax levied to reverse an undesirable or inefficient market outcome (Amadeo, 2019).  The point of instating one of these taxes into fast food is to reduce consumer consumption which would then lower health care costs and therefore cause consumers to lead healthier lifestyles. The reason for this tax is that about one third of Americans are obese which results in higher medical costs because of the health issues that consumers are more vulnerable to because of obesity (The Economist Newspaper Limited, 2009). However, if the possible outcomes of this tax are analyzed more deeply, the impact may be lesser than what one would expect. Studies show that taxes on items such as cigarettes and alcohol do not dissuade heavy users of these substances from buying them (The Economist Newspaper Limited, 2009). This might prove to be similar for avid junk food enthusiasts.

PROS

The pros of a fat tax according to a study done by Tejvan Pettinger at economicshelp.org, include an incentive to reduce the intake of fatty foods, raises in revenue for the government, lower taxes in general, high healthcare spending, encourages large food corporations to produce healthier foods, and makes food price equal to social cost (Pettinger, 2017).

A fat tax would make people pay the social cost of unhealthy food. Consumption of fatty foods have external costs on society. For example, eating unhealthy foods contributes to the problem of obesity. Obesity is estimated to cost the US economy around $6.6–7.4 billion a year (Pettinger, 2017). These costs are due to the treating of disease related to obesity, such as heart disease, angina, diabetes, strokes, time lost at work due to obesity issues, lost earnings from obesity-related disease and premature death. Those who are obese are 25% less likely to be in employment, leading to lower tax revenue and higher welfare spending on benefits (Pettinger, 2017).

A tax on fatty foods would make people pay the social cost of these foods. Increasing the cost of unhealthy foods, would reduce demand and play a role in reducing obesity levels. Making people pay social cost would achieve a more efficient allocation of resources. A tax on unhealthy foods would also encourage people to choose healthier foods which lead to improved health and would help reduce related disease (Pettinger, 2017).  

A fat tax would also encourage producers to supply foods lower in fat and sugar. Fast food outlets would have an incentive to provide a wider range of foods. Furthermore, through increasing tax on fatty foods, the government could raise substantial amounts of money. They could use this revenue to offset other taxes. Therefore, a fat tax could be revenue neutral (no overall increase in tax revenue). Alternatively, the money raised from ‘fat tax’ could be used to spend treating health costs of obesity. Also, a fat tax could be equity neutral (Pettinger, 2017). Some may say a fat tax is regressive (takes a higher % of income from low-income families), but if other regressive taxes are reduced the overall impact on equality should be unchanged. Similar taxes such as cigarette taxes have been widely accepted and contributed to long-term fall in cigarette smoking rates (Pettinger, 2017).

CONS

There are also plenty of cons to taxing fatty or unhealthy foods. It is difficult to know which foods deserve a fat tax. For example, cheese has high-fat content.  Many foods could contribute to obesity if eaten enough. There are many factors behind obesity. Obesity is caused by more factors than just over-consumption of ‘high fat’ high sugar foods (Pettinger, 2017). It includes issues such as size portions, amount of physical activity, and genetics (Pettinger, 2017). Another con would be that the tax is likely to be a regressive tax. Often people on low-incomes spend a high percent of their income on fatty foods (Pettinger, 2017). Furthermore, another con might be that the costs of obesity may be over-estimated. Obese people have lower life expectancy and therefore save government pension costs and health care costs in old age (Pettinger, 2017).

Solution

I believe that based on the findings and data that I have looked over, the best choice for the U.S is to put a “fat tax” into effect. The pros outweigh the cons in my opinion. Government revenue will rise and taxes on healthier foods will go down which will in turn cause people to live healthier lives. Obesity will eventually begin to decline with healthier food being the cheaper and better option. Not to mention higher healthcare spending will be possible with lower obesity rates because all the health problems caused by obesity will begin to diminish. Of course, instating a tax like this will take more research than this paper presents so as to eliminate some of the aforementioned cons. But in the grand scheme of things, a “fat tax”, I believe, would be beneficial not only to the health of the general population, but the entire country as well.

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