Taxing people into better lives

By Bill Kaye-Blake 30/10/2013

I’m struggling with sugar and fat taxes. The hope is that we can encourage people to improve their diets by changing relative food prices. We know that in theory we can, and that in practice there seems to be some effect.

But does it make those people better off?

This is purely an economics exercise, not a medical/public health one. So, all the usual assumptions and disclaimers apply.

Assume that someone drinks a lot of soda (technically, sugar-sweetened beverages — SSBs). The consumption contributes to their obesity and puts them at greater risk for diabetes. Let’s just focus on the diabetes angle. What this means is:

soda now > diabetes later.

That is, they prefer having soda now, and are less concerned about diabetes later. Or, rearranged:

soda now – diabetes later > 0.

This presentation emphasises that the pleasure from soda now, even once the diabetes later is taken into account, is net positive.

Now, let’s say that we tax soda so this person stops drinking it:

soda now + tax < diabetes now.

We haven’t made them ‘better off’. We have taken away their pleasure and substituted something less valuable.

There are essentially three ways that this might be an improvement:

  • information problem — they didn’t know how bad diabetes would be when they drank the soda, so the tax keeps them from the negative experience
  • time-inconsistent preferences — the future self would have wanted the past self to abstain
  • externalities — diabetes imposes costs on everyone else, so the person isn’t facing the true costs.

This third option is interesting. Let’s say I am poor. My consumption is generally constrained by my budget. The one area where this isn’t true is public goods — botanical gardens, beaches, education and healthcare. If I contract diabetes, I expand my use of healthcare beyond my own budget constraint. By drinking soda now and contracting diabetes, I am actually consuming outside my budget constraint. On the other hand, stopping people from drinking soda and thereby stopping them from contracting diabetes is pushing them back inside (or closer to) their budget constraint. Therefore, the policy makes them poorer.

Yes, I understand that it makes them healthier. I’m just not sure that it makes them ‘better off’.