Creating the climate

The University of Otago continues lobbying for fat taxes.

At Otago University's Waistline seminar yesterday, where politicians were challenged on ideas like a 20 per cent tax on sugary fizzy drinks, much of the attention was on big-picture regulatory policies, as weight-loss schemes directed at individuals are often not very effective.
...
Targeting teenage girls might be ideal, "but unfortunately teenagers aren't that receptive" to nutritional and physical activity interventions.

So the population-wide measures, like taxes on sugary drinks, were most likely to make a difference.

Several other researchers threw in traffic-light labelling - to mark foods as healthy or unhealthy - as an important part of combating a food "environment" which promotes obesity.

Professor Robert Beaglehole called for a national strategy on obesity reduction - which National MP Paul Hutchison said the Government would release in months - and for a social movement, as with tobacco control, to create the climate for controls on the food industry. [emphasis added]

"Obesity (here) is a public health disaster ... It is a tragedy at the personal, family and social levels. It's a pandemic." 

They want to create the climate for controls on the food industry. I suppose that the study on the social costs of obesity could have been part of that.

Beaglehole won the 2010 Public Health Association award; the PHA highlighted his work chairing the SmokeFree Coalition.

Previously:

• Some of the problems with taxing fats and sugars;
• More on fat taxes and fiscal externalities;
• The obese have higher lifetime health costs, but moral hazard through the health system isn't the cause;
• My quick fisk of the recent NZ obesity-costs study;
• Penn & Teller on nudges and fat taxes.

HT: ed.co.nz

Blind to others' ends

Marion Nestle's op-ed in the New York Daily News is breathtaking.

She begins:

If we want Americans to be healthy, we are going to have to take actions like this - and many more - and do so soon. It's long past time to tax sugar soda, crack down further on what gets sold in our schools, tackle abusive marketing practices, demand a redesign of labels - and extend the soda cap, no matter how controversial it may seem. This must be the beginning, not the end, of efforts toward a healthier America.

In short, we need a series of serious changes to make the healthy choice the easy choice. The soda size cap is a nudge in that direction. You will still be able to drink all the soda, and down all the sugar, that you want. The cap on soda size makes it just a tiny bit harder for you to do so.

...Most people eat whatever size is in front of them - the "default," in public health-speak - and are content with that amount. So a reasonable goal of public health intervention is to change the default drink to a smaller size. Hence: Bloomberg's 16-ounce size cap. From my nutritionist's perspective, a 16-ounce soda is still generous. Just one contains the equivalent of 12 packets of sugar. Just one provides 10% of the daily calorie needs of someone who typically eats 2,000 calories a day. Just one contains the upper limit of sugar intake that health officials recommend for an entire day. Once you down a 16-ounce soda, it's best to stop right there.

From my perspective, as someone who regularly shares a soda with his wife at the movies, having to leave a movie for a refill is more than a minor inconvenience and no longer being able to share a drink with your wife adds more than a minor cost. But Nestle either can't see the diversity of ends sought by those wishing larger sodas, or considers them irrelevant collateral damage.

So-called "nanny-state" measures - like bans on driving while drunk, smoking in public places and, now, selling absurdly large sugary drinks - help to level the playing field. Such measures are about giving everyone an equal opportunity to live a safer and healthier life.

I'd thought the point of drink-driving laws was the protection of other drivers. And that's how bans on smoking in public were sold, though that always seemed really rather a stretch when they started pushing for bans in outdoor areas.

The column doesn't get better.

At the moment, it is up to you to make healthier choices, but that's not easy in the face of relentless soda marketing. Governments have a responsibility to provide healthier environments for their citizens.

Yes, we're all helpless in the face of marketing. I think she needs some theory explaining why ads for soda are that much more persuasive than ads for milk and kale.

Here are some additional actions New York City should take, if only it were allowed to. Close the loopholes. The city does not have jurisdiction over sales of sodas in convenience stores and supermarkets. The state does. Gov. Cuomo denied Mayor Bloomberg's request to extend the size cap to those stores, not on principle but because he hadn't thought about it. He should, right now. Let's keep all sugary drinks to 16 ounces or less.

And what of larger families who like to share larger-sized drinks? Or buying soda for parties?

Fix the price differential. A 7.5-ounce can of soda costs twice as much per ounce as a two-liter bottle, and you can't buy just one; it comes in an 8-pack. Price determines sales. If a 16-ounce soda costs a dollar, a 32-ounce soda should cost two dollars.

Hey, let's extend her price control regime to everything. If a single toilet paper roll costs $0.25, there's clearly no reason that a 24-pack should cost anything other than $6.00. If a half-dozen eggs costs $4, then a dozen should cost $8. If a single drumstick at KFC is $1, then a 20-pack should be $20. If a night at a hotel is $100, then a week should be $700. There's no reason anybody might provide volume discounts except to foster addiction and overconsumption. If a motorbike with two wheels costs $10,000, then a car should cost $20,000 because it has twice as many wheels. Just put Marion Nestle in charge of the "Setting the price of everything" committee. It'll be great.

Tax sodas. Most people wouldn't dream of eating candy all day, but soda companies have made it seem normal to drink sodas from morning to night. Raising the price of sodas would discourage sales, especially among young people most susceptible to marketing efforts and most vulnerable to weight gain. A one-cent tax per ounce should do the trick and raise plenty of needed revenue besides.

I rather doubt that a one-cent-per-ounce tax would satisfy her thirst.

It goes on in this vein for a while. She concludes:

Actions like these will evoke ferocious opposition from the soda industry, and it will spare no expense to make sure such things never happen. We would surely hear more and more howls of "nanny-state" from those who insist Bloomberg has led us to the brink of a public health police state. Polls say that many New Yorkers oppose the 16-ounce cap and would oppose measures like this, too.

But I can't tell whether the opposition comes from genuine concern about limits on personal choice or because soda companies have spent millions of dollars to protect their interests and gin up histrionic, misinformed opposition.

Oh, those illegitimate howls of "nanny state" against a woman who wants to ban advertising of soda (if it looks to her like the marketing targets kids), ban vending machines in schools, mandate great big calorie warning labels on the front of containers, and ban 2-litre bottles from supermarkets.

Tax maximisation, smoking, and the Stalin Gap

If my lifestyle and leisure choices lead me to remit less to the government in taxes than I would have under alternative scenarios, have I imposed an externality on the State?

James Meanwell asks:

Eric, care to weigh in on a debate I'm having about this elsewhere? Specifically, does loss of tax revenue as a result of lower productivity (e.g. due to smoking, eating too much) count as an externality? I've argued that the government would have to be spending efficiently, which is unlikely, for the loss of revenue to count as an externality and so it probably doesn't (count). Not sure if that's right, but the notion (i.e. loss-of-revenue-due-to-lower-productivity-as-externality) seems odd to me.

I started replying to his comment, but reckoned it deserved its own post.

Let's start with the big picture and work down to details.

Consider two people, alike in relevant ways at age 10 and equal in earnings potential, but with different utility functions. So they make different choices.

Mr. A decides that the rat race isn't for him and decides instead to take a part-time job at 20 hours per week instead of 40. Were he to have worked a full time job, his earnings would have doubled and, because of progressive taxation, his tax payments would have more than doubled. But he's not on welfare; he just can transform relatively little income into a fair bit of happiness because he really likes leisure.

Mr. B does not enjoy sitting idle; he consumes his leisure by smoking while working a full-time job. Associated health issues reduce his productivity and, as consequence, he earns a quarter less than he otherwise would; his tax payments are then perhaps a third lower than they otherwise could have been. Other sources have a lower wage penalty for smoking; we'll stick with a big one for present purposes.

If Mr. B's lower tax payments because of his choice to smoke are of policy consequence, then so too are Mr. A's lower tax payments because of his choices. Indeed, we could say that Mr. A is far worse than Mr. B: while Mr. B pays, in New Zealand, about three times as much in tobacco excise as he'll cost the public health system and is so kind as to die before costing the superannuation system very much, Mr A pays zero tax on his leisure and will earn two-thirds of the national average wage in his retirement despite having contributed relatively little to the superannuation system.

If we need to use policy to nudge Mr. B into smoking less, because of reduced tax earnings, then we also need to nudge Mr. A into working harder. And when nudges don't work in tobacco and start becoming shoves, we need to start shoving Mr. A as well.

Mancur Olson argued that Stalinist Russia had the world's most effective extractive tax regime. Workers were effectively compelled to work by near complete inframarginal taxation combined with very low taxation at the margin. If Stalin had had the ability to solve the Socialist Calculation Problem, he could have done slightly better, leaving each worker with an individualised menu of two choices: starvation, or a personalised bundle of very hard work and some goods leaving the worker epsilon better off than under starvation. I suppose that we could consider any deviation from that level of work as a harm imposed on the state. But it's only Stalin who'd really want to push there.

The Okun Gap is the difference between potential and realised GDP due to excess unemployment. I'll call the Stalin Gap the difference between an individual's potential maximal tax payments and his actual tax payments based on his choice to consume leisure over labour - partially because he would choose some leisure even in the absence of taxes, partially because too high of income tax rates yields substitution to leisure.

Most of us could earn more, and consequently submit higher tax payments, by choosing more labour and less leisure. But we'd be less happy.

So that's the big picture: the world in which the smoker's lower income tax payments (ignoring his much much higher excise tax payments) are sufficient basis for taking away his leisure is one where we want to penalize people for taking holidays or failing to work as many hours as they otherwise could: closing the Stalin Gap. Unless we say that leisure via time off relaxing is, by assumption, good, while leisure via smoking is bad - but that remains question-begging.

Smaller picture: is this even an externality?


Short answer: likely, but likely very small, and that small portion mostly because of how the tax system treats poor people.

All right. An individual chooses between smoking, leisure and labour. In a world with private health care and no taxation, the individual optimally balances health harms from smoking against enjoyment of smoking - he earns less because he smokes, but that's just part of the full cost of tobacco that he enters into his optimisation. All you behavioural guys who want to complain about whether he can be rational or informed on this can shut up for the moment - we're trying to figure out whether he's imposing an externality on the government once we move to a tax regime, so the behavioural stuff is entirely beside the point.

Some optimal level of smoking will be found above. What happens when we add taxation and government? The smoker will bear fewer of the wage costs of smoking because the government takes a portion of his earnings and so he should optimally smoke more. But again, the same is true of the individual's choice to consume other forms of leisure in the presence of income taxation. Recall that in economics, we don't care about externalities because of pecuniary effects like "the government gets less in tax". We care about them rather because they distort choices: people move from taxed labour to untaxed leisure in the presence of income taxation. The incremental increase in smoking when the returns to labour drop under a taxation regime can be viewed as a distortion. But, again, think of anything that helps increase the marginal utility of leisure. In a world with taxes and government, people choose more days off playing cheap but excellent video games relative to the zero-tax world. What then is the productivity cost of video games? Or of any other kind of leisure? It's hard for me to see any productivity externality of smoking that is different in kind from any other labour-leisure distortion generated by taxation. And it would take some number crunching to show that the technological portion of any effect* here isn't already over-internalised by current levels of tobacco excise.

Gordon Tullock reminded us in 1998 that government produces externalities as well as solving some externality problems. The vast bulk of reduced income taxation accruing to government due to smoking could only be remedied by imposing harms on smokers that are larger than the potential gains to government. Now, if you want to assume that smokers are irrational and hurting themselves by their choice to smoke, you can do that, but you don't really need the effects on income taxation to make the case.

Recall that smoking is concentrated among poorer cohorts and that marginal tax rates, though not average tax rates, are very high for the poor. If the deadweight costs of high marginal tax rates are making poor people smoke more than they otherwise would because the personal income losses are low, they're probably also screwing up a whole lot of other choices that are of greater consequence as well. If you're going to worry about it, start by trying to fix the tax schedule and abatement rates for the various income-contingent benefits so that the effective marginal tax rates facing poor families are not insanely high.

The Ministry for Social Development noted that 35% of beneficiaries (people receiving benefits other than just Working for Families, NZ's EITC) in paid work in 2008 enjoyed effective marginal tax rates higher than 75%, with some non-beneficiary low income families enduring abatement of the minimum family tax credit facing EMTRs over 100%. MSD concluded dryly, "Work incentives are very low for such families".

Effective marginal tax rates in excess of 75% are very likely to induce all sorts of very real distortions in behaviour; I expect the decision to smoke incrementally more because of reduced returns to wages is pretty trivial in this mess.



* Again, we don't care about externalities that are pecuniary. Imagine that the smoker smokes exactly as much under a tax regime as under a no-tax regime. The government earns less than it would were the smoker a non-smoker, but this is purely pecuniary: the gain to the government by forcing him to quit would be overmatched by the losses experienced by the smoker. The only portion that can matter for welfare is the excess smoking induced by the lower return to labour under the tax regime. And that's unlikely to be large relative to the amount of smoking that's invariant to income tax rates.

More fat taxes, and a minor correction

I chatted with Radio New Zealand about fat taxes on Wednesday. I talked about the problems of defining healthy and unhealthy foods, and the lobbying waste that can result around boundary cases if we go the route of taxing specific foods rather than content. And I noted that Denmark dropped its fat tax because of the administrative cost it placed on Danish firms, as well as the cross-border shopping it induced. So the summary here isn't quite accurate. I wouldn't have said that it was abandoned because of the difficulty of defining healthy and unhealthy foods; I gave that as a reason against implementing one here, but that wasn't quite what happened in Denmark.

For more on Denmark's abandoning of fat taxes, see:

• The Economist
• The New York Times

The Times story notes that it's harder to introduce comprehensive taxes like Denmark's than to simply tax soda. It doesn't note that if you only tax soda, people flip to other sugary products. If you're going to do it at all, you probably have to do it comprehensively: excise on sugar or fat following a regime similar to that for alcohol in that it's levied on producers at the point of manufacture. 

A few minor problems that would need to be sorted out:

• Small producers will have problems in paying the tax up front while waiting for payment of product. Not sure there's much that can be done about it other than giving a bit of time to make payment. I know that some of the smaller alcohol producers worry about this when looking at cash-flow.
• Some food products are both input and output - you can either buy sugar or fats as a consumer product, or you can buy them as an input for making other stuff. If any sugar bought as an input turns 100% into something present in the consumer product, then this doesn't matter. You tax it at point of production and the effect flows through the system. But what of food production where the sugar or fat itself disappears but is a necessary intermediate good? If you fry with butter, only some of that butter makes it into the food (compared to, say, just eating a stick of butter). If you turn sugar into alcohol, the sugar's then gone. Any sugar or fat that cooks off or is turned into other things as part of the food production process means that you're going to have to have a tax rebate system for people using sugar or fat as an input.
• You might think this is easily solved by taxing only those who sell directly for final use. But you still need a way of registering and tracking those who buy products for intermediate good use from the same outlets that sell to final consumers. And you'd still have the problem of assessing things properly for home-based production. If we tax based on the average amount consumed, people who eat sticks of butter are relatively under-taxed while those who use it for greasing cast-iron pans are over-taxed. The same problem holds for cooking with alcohol, and is recognized with tax-free salted cooking wines and sherries. Maybe it is a less important problem in cooking - I do not know enough about food chemistry to know. But I do know that some home brewers and distillers use sugar; maybe taxing them on sugar they don't eat is a second best workaround for there being no tax on small-scale home distillation. 
• If you tax sucrose, people will switch to fructose and glucose. You've gotta tax all the sugars to avoid any inefficient switching, but if there's reason to expect that any of the sugars are less bad than the others, you could levy different taxes.
• You'd need to set up a regime for assessing tax on imported food products, with the importer then being liable for any fat/sugar tax. So long as imported products have all the nutritional labelling that would allow accurate and timely excise assessment, great. Delays at the border kinda suck though, especially for fresh fruit that should be subject to any sugar tax. I suppose that we could deem different categories of fruit to contain some average sugar content and tax them appropriately. [I still don't get why folks who want fat and sugar taxes want to subsidise sugar-laden fruits. Fructose doesn't get any less fructosy for being embodied in a strawberry]. 
• There are substitutes for fat that are worse than fat. I expect a reasonable amount of awfulness consequent to any large tax on butter, lard, or other common fats.

More fundamentally, I just do not believe that there is a plausible market failure based case for fat and sugar taxes. 

The best case you can make for it is the fiscal externality where people eat less healthy things and the cost is borne by the public health system, but I don't find it all that compelling an argument. Recall that we impose Pigovean taxes not because we want to punish bad people but rather to get rid of the deadweight cost of some underlying inefficiency. If fat and sugar consumption are not all that elastic, then the bulk of the effect of the public health system is pecuniary rather than technological. That is, if in a world where people paid 100% of their own health care costs, they wouldn't consume that much less sugar, then the public health system does not much screw up our choices over fat and sugar consumption. And the point of a Pigovean tax is to induce people to make the choice that they would have made in a full-cost world.

Still too opaque? Here's an analogy. Suppose that you (and a lot of people like you) love Marmite and Chex. You have to eat them together - whenever you buy Marmite, you have to eat it on a Chex biscuit. And you eat 3 of those cracker-Marmite combos per day, no matter what. Each of them costs $1, with half the cost being Marmite and half the cost being the Chex. But your demand curve is perfectly inelastic: if the cost were $10, you'd still be eating three per day. Now the government comes in and says that, from now on, Marmite is free. You go to the government dispensary every day and get three servings of Marmite to put on your Chex. Then somebody comes out and puts out a "Social Costs of Chex" study that counts as cost to the country everything that the government spends on Marmite because of people who mix Marmite and Chex. You can make a fairness argument for a Chex tax to compensate the government for its Marmite expenditures - in which case you wonder why they made it free in the first place. But you can't make an economic efficiency argument for it - it's just a transfer. And what about all the people who eat their Chex without Marmite and whose consumption of Chex may be more sensitive to price?

More realistically, there's a mix of technological and pecuniary effects. Because people aren't annually confronted with an insurance bill itemising their failures and the things they could do to lower their costs for the subsequent years, people very likely make some different choices around nutrition, exercise and risk than they otherwise would. But how much of the total cost of their health care would have obtained anyway, and how much is due to the distortion in behaviour caused by the existence of the public health system? Suppose that some of our Chex-eaters, above, shift to eating 4 Chex per day instead of 3 after the free-Marmite policy. That last Chex-and-Marmite bit of wonderfulness is inefficiently consumed and could be subject to Pigovean taxation, but everybody seems to think we need to be charging enough to cover all the free-government-Marmite costs of Chex eaters. 

Further, I've yet to see any full life-cycle costing on obesity. You can get big numbers if you add up the costs of obesity-related disorders, but what about savings to the pension system where the obese die early? And what about the costs that the obese would have imposed on the health system in old age were they instead thin people? I suspect that the sign of the effect is still negative, but I'm not massively confident about it. And I doubt that many of those proposing fat and sugar taxes care about the true direction of the sign on the pecuniary effect. I still worry that, someday, we'll figure out that it's the healthy people who live to 100 who wind up costing the government the most money. And then...

The other argument you can make for fat and sugar taxes is based around behavioural economics and internalities. The case there is that while some true version of ourselves would like to constrain our existing selves against eating tasty things that may have long run costs, that true version of ourselves is every day thwarted by the me-of-the-moment who insists on eating too much Marmite-and-Chex.* But that requires, pretty critically, that those individuals, if given the choice, would prefer to be bound against consuming the less healthy products. And even if we can show that for some individuals, that hardly gives us reason to impose population-wide measures that hit those who really prefer to be unbound - you would have to prove that the internality-based gains to those with self-control problems outweigh the losses in surplus imposed on the rest of us. And, you'd have to show that fat and soda taxes are the most efficient means to that end in a world that has Stickk.

Previously on-topic at Offsetting:

• Paternalism: for children and the lower orders.
• Fat taxes and elasticity with respect to public health
• Penn & Teller on Nudges and Fat Taxes
• Paternalism and class
• Fat Freedom
• Obesity Costs

* I can't stop thinking about Marmite and Chex now. I hate you Kiwis for getting me hooked on the stuff just before the earthquake shut down the Marmite factory.  

Obesity costs

Another day, another cost study. This time we're told that obesity costs New Zealand between $722,000,000 and $849,000,000.

Here's a thought experiment. Imagine that we wave a costless magic wand and every obese person suddenly has a BMI right in the middle of the healthy range. Would long term health costs increase or decrease? Well, we know that we'd save a bunch of current costs of treating diabetes. But everyone dies of something, eventually. And many of those somethings affect the Ministry of Health's budget. If the diseases from which the obese would otherwise die are less expensive than the diseases that do affect the obese, then obesity has net cost on the health system: the cost difference and time discounting. But we really should net out the costs that the obese would have imposed had they not imposed obesity-related costs.

Total health care costs were estimated at $623.9 million. The additional costs were costs of productivity losses associated with obesity: premature mortality and excess sick leave. Here's the two approaches they used.

The "Human Capital Approach" takes the present discounted value of all future earnings up to the age of retirement for those who died prematurely due to obesity. The "Frictional Cost Approach" takes three months' base salary assuming average salaries and workforce participation rates, then adding an additional training and recruitment cost of 97% of the FCA premature death cost. They added to both of these costs of short term absenteeism: the overweight and obese take an extra 0.4 days' sick leave on average in Australia; this was multiplied by obesity prevalence rates and average population daily wage rates. Depending on whether the FCA or HCA method were used, that gives us the additional $98-225 million.

But there are a few problems here too. Obesity is pretty concentrated in lower income strata. Some of this will be obesity issues resulting in lower salaries, but it seems awfully likely that the kinds of things that lead to obesity are also the kinds of things that lead to lower income. Using average wage rates and average workforce participation rates then is a pretty poor proxy for wage rates among those whose obesity issues were so severe that they died early as consequence. You could make a case for it where obesity caused the lower wages; when it's more a consequence of other factors that drive income, as well as having its own negative effect on income, not so much.

The study's authors note this:

With regards to the estimates of the lost productivity costs, it could be argued that obesity and overweight is more prevalent among low SES groups and therefore using an average wage to calculate the productivity cost estimates is not a true reflection of the costs. Our analysis was based on the availability of average wage and participation rates data in NZ.

But there's an awful lot of data out there that would let you scale wage rates among the obese. For example, the 2008/2009 NZ Adult Nutrition Survey. They sort people by NZ Deprivation Index 2006 quintiles, where 1 is least deprived and 5 is most deprived. 41% of Decile 5 females class as obese, with only 26.8% normal; 48.5% of Decile 1 females class as normal and 16.5% as obese. The male profile is flatter in income. Here's the table.

All you'd need to do is weight wages by relative quintile populations and quintile wage rates. You could at least get an average fractional multiplier to apply to the average age-wage-gender profile.

I wonder how many multiples of the total annual health care budget you'd get if you added up all the different "Costs to the health system" figures.

In related news, the Science Media Centre asked me for comment on a new metastudy on the effects of fat taxes. Here's what I provided; bits of this may be showing up in a few places.

"Taxes and subsidies to encourage healthy eating are notoriously difficult to administer in the real world. They're the kind of thing that sounds simple, but wind up being a bit of a compliance nightmare. Why subsidise fresh vegetables while ignoring frozen or canned vegetables, which are just as nutritious and favoured by poorer cohorts? Where then do we draw the line between a frozen unprocessed product and one that's too processed to count any longer? If minted peas count, where do we draw the line between a frozen vegetable and a processed food product? I'm reminded of a recent Australian case where a judge had to decide whether a mini-ciabatta counted as bread (GST-exempt) or as a cracker (subject to GST). The food importer flew in a bread expert from Italy as a witness in the case. These kinds of systems lead companies to find strong tax advantage in having their products being declared compliant. The accountants, lawyers and bread-deciders can do well out of it, but that's not necessarily to the national advantage. Denmark recently abandoned its one-year-old fat tax because of the administrative burden it placed on Danish firms."

"The paper finds a ten percent increase in the price of soft drinks via a soda tax would reduce soda consumption by 9.3 percent but would only reduce overall energy consumption by 0.2%. People who want to consume sweet things shift away from taxed sweet things to less-taxed sweet things."

"The paper focuses on the effects of tax and subsidies intended to affect consumer behaviour. Another way of tackling the problem is to look at how consumer behaviour changes with other changes in the relative prices of healthy and less healthy foods. Jonah Gelbach, Jon Klick and Tom Stratmann used American data from 1982 to 1996 to see whether changes in the relative prices of healthy and unhealthy foods over time across U.S. regions affected obesity rates. Because overall food prices vary by a lot more than any real world fat tax, their study gives us a way of examining what can happen with very large price increases. They found that the relative price of healthy food really does little to determine overall obesity rates. While we should not expect large health benefits from fat or sugar taxes, the administrative costs are real and substantial."

See also this Mercatus primer.