Fat Taxes, or Just Fat?

Friday, July 2, 2010

It’s commonly claimed that ignorance induced consumers with few resources to buy houses they could not afford. To the contrary, consumers who bought a house with almost no down payment and a low interest rate were displaying not ignorance but good sense. They put little of their own resources at risk, mortgage payments were cheap, and housing prices were expected to continue to rise rapidly. Lenders, the Fed, and others who made these loans (or helped keep interest rates low) made the mistakes and now look foolish, not the consumers who bought the houses.

Almost all consumers, even those with little education, know their own interests far better than government officials do. Still, I have no objections to governments offering consumers information where it is difficult to acquire; restaurant food-safety cases may be one example. I can also accept putting information about the harmful effects of cigarettes on cigarette packages, although I doubt whether this has had much effect in reducing smoking.

In that vein, some have pondered what government should do about obesity. Obesity in the United States and elsewhere has been increasing for the past thirty years, not only because the cost of calories has fallen, as in fast foods, but also because of sedentary habits, chief among them time spent on television, computers, and other electronic media. Giving consumers information about the harm caused by obesity might be a useful government activity. Some people, however, want to go much further by essentially taxing some of the sources of obesity, such as sodas and computer games. I do not agree.

LECTURING THE CONSUMER

My fellow blogger, Richard Posner, supports aggressive actions against obesity partly because he believes the problem stems from consumer ignorance of the dangers of being obese. He points out that obesity is much more common among people who are poor and not well educated. But people with low incomes and educational levels differ in many respects from those who are better off. Take their greater tendency to buy older, less-reliable used cars: no one would suggest they do this out of ignorance rather than the constraints of income. Similarly, fast foods, and fewer visits to health clubs, would appeal to low-income people without any need to stress ignorance.

A much-cited study finds that private payers, not taxpayers under Medicare and Medicaid, bear more than half the additional medical costs due to obesity.

Further evidence that ignorance is not the main driver of high obesity rates: the rate of obesity is much higher among African-American women than among white women, but it is not so much higher among African-American men than among white men. It is hard to believe that African-American men are much better informed about the harmful effects of obesity than African-American women. This racial-gender difference in obesity rates is most likely related to differences in people’s life situations rather than to differences in their knowledge of obesity’s health costs.

Posner’s second main argument for taxing obesity is that it imposes an externality on taxpayers because they pay much of the higher cost of medical care. The most frequently cited study of the extra medical spending due to obesity is by Finkelstein, et al., in Health Affairs. Published in July 2009, it is a careful analysis of data for 2006 that looks at the higher spending on medical care of the obese, after holding constant income category, years of schooling, age, and many other variables. Overall, the authors find that about 25 percent of the population is obese, and that obesity increases medical spending by about 9 percent, which amounts to $147 billion (in 2008 dollars).

But they also find that private payers, not taxpayers under Medicare and Medicaid, bear more than half of the additional medical costs that are due to obesity. Since private insurance companies are not allowed to charge the obese higher premiums because that is considered discrimination, largely under the Americans with Disabilities Act, the higher cost of obesity paid by privately insured persons can hardly be called an “externality,” unless it is considered an externality from government policy.

If we take away this increased medical spending because it is not borne by taxpayers, we are left with a much more modest increase in health-spending “externalities” due to obesity. Even that smaller amount is too large because it neglects a grim fact: obese people die younger than others. On this externality logic, such “savings” should be subtracted to get a net externality. Some analysts have even claimed that this net externality is negative, so that obese people actually reduce taxpayer spending on medical care. If that is correct, should we subsidize obesity?

THE EXTERNALITY VANISHES

I have rejected externality arguments related to medical care since several economists showed that smoking also cuts down medical (and retirement) spending. Heavy smokers, like the obese, usually live shorter lives, and do not collect much in the way of Social Security and Medicare benefits. Surely that would be a foolish justification for subsidizing smoking. Yet the same logic applies to attempts to justify an obesity tax because of medical costs supposedly imposed on taxpayers.

The obesity “externality” provides an exceptionally weak case for taxing goods like sugary soft drinks, fast foods, and ice cream, or sedentary activities like playing computer games. As Posner recognizes, taxes on these types of foods and activities would be a shotgun approach to reducing obesity because so many of them are consumed by men and women who are of normal weight or are merely overweight. (An earlier study does not find increased medical spending for men and women who are simply overweight.) Higher taxes on these items would reduce the consumption of these items, and hence cause an unjustified loss in welfare, among the 75 percent of the population who are not obese.

To the extent that obesity imposes costs on others, it would be far better to let private health insurers price coverage based on obesity and related risk factors. Doing so would target the desired group and avoid imposing inefficient costs on non-obese people by taxing their foods or activities.

Giving people information about the health consequences of obesity would do no harm, and might even keep some people from becoming or staying obese. Doing more than that, however, finds little justification from externality arguments and forms a weak basis for public policy.