Mark Bittman Embraces the Food Nanny State

Bittman, who typically writes more about food (I love his minimalist recipes) and less about food policy, fully embraces the idea of taxing "bad" food and subsiding "good" food:
....Rather than subsidizing the production of unhealthful foods, we should turn the tables and tax things like soda, French fries, doughnuts and hyperprocessed snacks. The resulting income should be earmarked for a program that encourages a sound diet for Americans by making healthy food more affordable and widely available....
He gets into details:
...Sweetened drinks could be taxed at 2 cents per ounce, so a six-pack of Pepsi would cost $1.44 more than it does now. An equivalent tax on fries might be 50 cents per serving; a quarter extra for a doughnut. (We have experts who can figure out how “bad” a food should be to qualify, and what the rate should be; right now they’re busy calculating ethanol subsidies. Diet sodas would not be taxed.)...
Maybe those experts would be the same ones who brought us the Food Pyramid.

Anyway, this does seem like the kind of thing that could get messy.  Do I really need to point to our political environment?

Something simpler, like a tax on sugar-sweetened beverages may make more sense.  At least it's specific enough to get our heads around.  Also, sugar may also be *the* culprit in our obesity/diabetes epidemic. And apparently there has been some research on it:
Much of the research on beverage taxes comes from the Rudd Center for Food Policy and Obesity at Yale. Its projections indicate that taxes become significant at the equivalent of about a penny an ounce, a level at which three very good things should begin to happen: the consumption of sugar-sweetened beverages should decrease, as should the incidence of disease and therefore public health costs; and money could be raised for other uses.
I checked out the Rudd Center and found this study(pdf).  The crux, of course, is the elasticity of demand: how much will people cut consumption of sugar-sweetened beverages if they are taxed?  That is a very difficult thing to measure.  I've never seen it done in a truly convincing way.  It must be especially difficult in the soft-drink business given the market power of Coke and Pepsi and the complex strategic pricing games they must play with each other.  Regional variation in pricing must have a lot to do with regional differences in demand elasticities; cross-sectional regressions won't work (sorry if that's a bit wonkish--economists should know what I'm talking about).

Then again, I don't really know this literature well so maybe I missed the really compelling study.

Unfortunately the paper above doesn't help much.  It simply cites other work for the crucial demand elasticity, which they pin between -0.8 and -1.2.  If the number is -1 it says consumption declines by 1% for every 1% increase in price.  This assumes  that if we increase price of a 20oz soda from $1.25 to $1.45 consumption would decline by roughly 7%, holding all else the same.

I don't know if that is reasonable or not; I'd need to follow the chain of citations a bit more and dig into modelling assumptions and identification strategies.  Experience makes me dubious that the underlying economic science is very compelling, but I am prejudging here.

But let's just suppose that's right.

The biggest challenge I see is that diet drinks wouldn't be taxed and the best way to get a large demand response would be to cause the price of sugary drinks to go up while keeping diet drink prices constant. Now, it seems to me that Bitterman (and the underlying studies) assume full pass-through of the tax on retail price.  I'm pretty sure that won't happen in reality.

In reality Coke and PepsiCo will price beverage strategically, given they have considerable market power.  Given this, I would expect the big soft drink companies to increase the price diet drinks nearly commensurately with sugar drinks, and that the price increase would fall far short of the tax amount.  That's because prices will be tied first and foremost to the elasticity of demand, not marginal cost.

To prove my point, here's an example of a similar situation: The FAA tax on airlines expired last Friday night.  You might think that the tax expiration would cause airfare to go down commensurately.  Not.  Most airlines simply raised prices to by the amount of the tax

So, even the sugary beverage tax is likely to get complicated. And I'm quite sure Coke and Pepsi won't take this sort of thing lying down.

I'm not radically against the idea of a mild food-nanny state.  But I rather imagine that this kind of thing, if passed, might be far less beneficial and have far more unintended consequences than one might initially think.

Comments

  1. There are many recent studies that estimate effects of a fat tax. The results show that the effects are very small. Dharmasena and Capps (Health Econ, 2011), for example, show that a 1% increase in the price of sugary-sweetened beverages would lead to a weight loss of 0.077 lbs annually at average consumption levels. Lusk and Schroeter (Health Econ, 2011) show people would have to value a 1 lb weight loss at around $1500 for this weight level of weight loss to be welfare enhancing.

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  2. "Show" is a strong word. There are different studies supposedly showing very different things. I guess I've grown bitterly skeptical of most studies until I have a firm grasp of the data and identification strategies.

    And "fat" is probably the wrong thing to be taxing.

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  3. But then I wouldn't be surprised at all of a tiny effect, or potentially nonexistent effect.

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  4. Political economy aside (let's be silly) what is conjectured is a feature not a bug. Coke and Pepsi render the "demand curve(s)" for their products inelastic and we now have a very efficient tax. No change in demand? Keep raising the rate. Minimal DWL and health care financing problem solved. Yipee! Are user fees a hallmark of the nanny state? Calling John Boehner.

    ReplyDelete
  5. Stever Schran: Well, if the goal is tax revenue, you may well be right.

    Whether this kind of thing is a good idea or not, it sure raises some interesting empirical IO and economics of taxation questions.

    ReplyDelete

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