Sunday, October 4, 2009

FAT – SHOULD IT BE TAXED?


For a long time, debates on taxing unhealthy and fatty food have been going on in parliaments across the world. Environmentalists, health specialists and economists have been perseveringly lobbying to impose a tax on unhealthy fattening foods.
Fatty food cause obesity and obesity is the most significant direct and indirect killer in the world.
      A little bit of statistics to signify the impact of obesity. There are over 1 Billion over-weight and 300 million clinically obese adults across the world – that is 15% and 4% of world population respectively. Over 20% children below the age of 5 are obese.
Globally, 400,000 people die each year due to ailments related to obesity.
As per World Health Organization, obesity and overweight pose major risks for chronic and fatal diseases such as cardiovascular disease, hypertension, type 2 diabetes, heart stroke and many forms of cancer. Some non-fatal but equally distressing health issues such as respiratory ailments, musculoskeletal problems, skin problems and infertility have been clinically linked with obesity.
      Economically, obesity has a severe impact on health costs and work productivity.
Studies have concluded that annually over USD 200 Billion are spent on obese related health issues. The true costs are significantly higher as not all obesity-related situations are included in the computations as much of the data is missing from developing countries.
Work productivity takes a toll as well. There is a high correlation between obesity and productivity loss. A study in the United States has indicated that obese workers with type 2 diabetes report lesser productivity on the job than their normal-weight co-workers. The analysis also found that obese people lose 11% to 15% of work time that is about 5.9 hours a week.
      Production of food that goes behind causing obesity in much people has an environmental hazard as well. Beef is the primary meat used in fast food like hamburgers. The United Nations has released a report which suggests that the world’s cattle population is the largest source of global warming. As per the report, approximately 18% of world greenhouse gases are emitted by cattle. That is larger than the total emission by all forms of transportation. When cows belch, they produce methane which warms the earth 20 times more than CO2. So, next time when you are relishing on a hamburger, you should consider the adverse impact of hamburger on the environment.
      It is observed that key causes in this growing obesity trend are increased consumption of energy-dense foods high in saturated fats and sugar carbohydrates, and reduced physical activity. According to the Census of Retail Trade, the per-capita number of fast-food restaurants in the United States doubled between 1972 and 1999 while the obesity rate climbed from 13.9% to 29.6%. The per-capita number of fast food restaurants and obesity rate are correlated and there exists a causal relationship between the two.
Legislators unanimously agree that Government intervention is perfectly just and rational when ramification of individual choices is imposed on others — this phenomenon in economics is termed as externalities. Economists globally are demanding levying Pigovian taxes on unhealthy and low-nutrition foods. According to Wikipedia, a Pigovian tax in economics terms is a tax levied on market activity to correct the market outcome if there are negative externalities associated with the market activity. In the presence of negative externalities the social cost of a market activity is not covered by the private cost of the activity. In such a case, the market outcome is not efficient and the market tends to over-supply the product. A Pigovian tax equal to the negative externality is thought to correct the market outcome to be efficient.
Pigovian taxes have been prevalent across the world for a long time. These taxes have successfully curbed demand for socially degenerating products like tobacco, alcohol and gambling. A calorie tax on unhealthy foods such as fast food, sugar sweetened beverages and chocolates should have a similar effect on demand for these products. 
      Calorie tax will raise the marginal costs for suppliers and will hence reduce supply. At the same time, costs to the consumer will increase resulting in reduction in quantity demanded. The new demand supply equilibrium will be set at higher cost and lower supply. The key to evaluate the benefits of this tax is to understand the demand elasticity of fast food. If the elasticity for fast food is small, then higher taxes will not reduce demand significantly. However, in general market conditions, price elasticity of fast food is reasonably high, and with the increase in prices due to taxes, there will be a fall in demand.
Substitute to fast food and sugar sweetened beverages are healthy foods like fruits and fresh juices. With increased prices for fatty foods, demand for healthy foods will go up.
Major fast food consumers in developed countries are populace with lower income levels. This population segment is price sensitive and the rise in prices of fast food will drive them to look for alternative foods. 
      Another advantage of calorie tax is the surge in tax revenue for the Government. It is estimated that US Federal Government can collect USD 500 Billion in tax revenue over 10 years. This huge tax corpus can be used to boost productivity and popularity of healthy foods. R&D initiatives should be taken to increase agricultural productivity. Mass media marketing can be used to create public awareness on advantages of healthy food consumption and repercussions of eating fatty foods.
      The fast food industry in USA clocked revenue of USD 130 billion in 2006 and this figure is rising by 7% annually. With the rise of middle class in developing countries like India and China, worldwide fast food revenues are increasing exponentially. For e.g., Yum Brands – owners of brands like KFC, Pizza Hut and Taco Bell clocked USD 11 Billion revenues worldwide while McDonalds – the fast food giant made USD 24 Billion in revenue. 
Though the argument to tax fatty foods to reduce obesity seems convincing, there are some obvious flaws.
Firstly, Fast food cannot single handedly be attributed to this rise in obesity. One major factor in this rising obesity is the sedentary lifestyle of modern times. It is possible that one eats significant amount of fast foods and then exercises to maintain a healthy life.
Secondly, if fast food becomes expensive and less accessible, people will have to spend precious time to buy ingredients and cook. This will result in less available time for exercising and will again be instrumental in rising obesity. Finally, fast food generally tastes better and taste significantly affects consumer buying habits. 
      Policy makers across the world have to acknowledge that there is no single method to curb the fast food popularity trend. Multiple actions have to be taken.
Some of them can be –
  1. Imposing additional excise duty or sales tax on foods with negligible nutrition value.
  2. Similar to cigarettes, put visibly prominent graphics on fatty foods indicating their nutritional values.
  3. Requiring restaurants to list nutrition information about each dish on the menu
  4. Banning advertising and limiting the marketing of fattening food

So let’s hope that the decision makers realize and then act upon these plans to reduce obesity and make the world a healthier place to live.

6 comments:

AR said...

wow
I am overwhelmed
From onwards I will Never !!!

Never read your blog : it makes me feel like a mere mortal :P

Anonymous said...

Thats very interesting...never knew there were economics of the fat! Was this a part of some thesis or something? lol but hats off for thaamount of research that had gone in...

instant_blogger said...

yes- its pretty amusing
aint it :-)
Its part of my economics project. We were suppose to chose our own topics. I liked this idea !!
Hope u liked it

Anonymous said...

Your blog keeps getting better and better! Your older articles are not as good as newer ones you have a lot more creativity and originality now keep it up!

instant_blogger said...

Thanks anonymous !!
Would like you to reveal your identity though :)

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