Considerations

A team from Uni­ver­sity of North Car­olina at Chapel Hill seems to think that a tax on pizza and soda would offer finan­cial advice and finan­cial help:

U.S. researchers esti­mate that an 18 per­cent tax on pizza and soda can push down U.S. adults’ calo­rie intake enough to lower their aver­age weight by 5 pounds (2 kg) per year.

The researchers, writ­ing in the jour­nal Archives of Inter­nal Med­i­cine on Mon­day, sug­gested tax­ing could be used as a weapon in the fight against obe­sity, which costs the United States an esti­mated $147 bil­lion a year in health costs.

“While such poli­cies will not solve the obe­sity epi­demic in its entirety and may face con­sid­er­able oppo­si­tion from food man­u­fac­tur­ers and sell­ers, they could prove an impor­tant strat­egy to address over­con­sump­tion, help reduce energy intake and poten­tially aid in weight loss and reduced rates of dia­betes among U.S. adults,” wrote the team led by Kiyah Duf­fey of the Uni­ver­sity of North Car­olina at Chapel Hill.

In eco­nom­ics terms, the price-elasticity of a prod­uct mea­sures how the demand for a prod­uct changes (or not) when the price changes. Or, in other terms: how much will an increase in price lower sales?

Items that are inelas­tic are not gen­er­ally affected by changes in price. Accord­ing to Wikipedia, the con­sump­tion of items like beef, legal gam­bling, and movie-theater tick­ets does not fluc­tu­ate when the price changes. How­ever,  soft drinks like Coca-Cola and Sprite, for exam­ple, are elas­tic goods whose sales decline sig­nif­i­cantly when the price increases.

(I had expected some of the data to be dif­fer­ent — I would have thought that movie-theater tick­ets would be very elas­tic since peo­ple now have options includ­ing cable, Net­flix, and TiVo as well as a result of the fact that the price of movie tick­ets has risen 66% since 1929 and the price of pop­corn has sky­rock­eted an evil 666%! More­over, I’m not sure I believe that peo­ple con­cern them­selves with the cost of soft drinks, espe­cially since con­sumers drink so much soda and pop.)

Well, a tax on soft drinks may dis­cour­age soda con­sump­tion. But what about cig­a­rettes? The addic­tion to cig­a­rettes laden with nico­tine is far stronger than a desire for sweet syrup. Here are some statistics:

Accord­ing to the U.S. Cen­ters for Dis­ease Con­trol:

Research shows that tax increases on tobacco prod­ucts are an effec­tive pol­icy inter­ven­tion designed to pre­vent ini­ti­a­tion of ado­les­cents and young adults, reduce cig­a­rette con­sump­tion, and increase the num­ber of smok­ers who quit. A 10% increase in the price of cig­a­rettes is esti­mated to reduce con­sump­tion by 4%.

From a U.S. National Insti­tute of Health study on Taiwan:

The model pre­dicts that sus­tained tax increases have the poten­tial to sub­stan­tially reduce the num­ber of smok­ers and the num­ber of pre­ma­ture deaths, with the effects grow­ing over time. Index­ing taxes to infla­tion stems ero­sion of the tax effect. In our model, when the tax increases by 10 times (NT$50) over the recent tax increase (NT$5) and taxes are indexed to infla­tion, the smok­ing preva­lence rate falls by over 15% soon after the tax increase, and by about 30% in rel­a­tive terms by the year 2040, result­ing in 4500 lives saved per year.

Accord­ing to the gov­ern­ment of China and the Uni­ver­sity of California:

…if China’s cig­a­rette tax rate was raised to 51 per­cent of the retail price, an increase of 11 per­cent­age points from the cur­rent level, 13.7 mil­lion smok­ers would there­fore quit smok­ing and 3.4 mil­lion lives would be saved. The tax rate increase could also gen­er­ate 64.9 bil­lion yuan ($9.5 bil­lion) in addi­tional rev­enue for the gov­ern­ment every year.

Inter­est­ingly enough, higher taxes reduce smok­ing but increase ille­gal sales of cig­a­rettes in lower-income communities:

Accord­ing to a study con­ducted by researchers at Colum­bia Uni­ver­sity Mail­man School of Pub­lic Health, a dra­matic rise in ille­gal street sales of untaxed cig­a­rettes was reported among minor­ity low-income per­sons imme­di­ately after the price increase that rein­forced smok­ing and under­mined ces­sa­tion efforts.

But does the data sup­port these con­clu­sions? Items with a price-elasticity of greater than one is viewed as elas­tic (prices mat­ter more); those less than one are inelas­tic (prices mat­ter less). Accord­ing to the same Wikipedia page, the price-elasticity of cig­a­rettes is:

• –0.3 to –0.6 — US population
• –0.6 to –0.7 — US children

So, the pic­ture is some­what com­pli­cated. No item is infi­nitely inelas­tic — if the price of tap water (which is con­sid­ered inelas­tic) would surge to $100 per liter, peo­ple would drink a lot less. So, a rise in prices always cuts demand at least a lit­tle. But as the price-elasticity of cig­a­rettes shows, the addic­tion to nico­tine is stronger than the U.S. researchers prob­a­bly real­ize. Smok­ing would decline — but not as much as one might expect. (This is why other mea­sures — like early edu­ca­tion and active par­ent­ing — are also important.)

But what about pizza? An eighteen-percent tax would increase the price of a pie from $10 to $11.80. It’s not that much of an addi­tional bur­den for some­one who orders deliv­ery once a week. (Hope­fully, it is not a daily meal sim­i­lar to smok­ers who pur­chase at least a pack each day!) Foods that are desires (like pizza) are indeed more sus­cep­ti­ble to price increases than those that are needs (like milk and bread), but pizza could be con­sid­ered a lux­ury item — at least in this econ­omy — that peo­ple choose to enjoy once in a while regard­less of price.

More­over, it may be dif­fi­cult for leg­is­la­tures who would write such a law (or for the executive-level bureau­crats who would enforce it) to define “pizza” accu­rately. Since the intent of a tax would be to encour­age healthy lifestyles, would piz­zas using low-fat cheese and hav­ing only veg­e­tar­ian top­pings be exempt? Is a cal­zone a pizza? How about the frozen pizza-bagels that one can microwave? What if some­one puts tomato sauce and cheese on a toasted bagel? What about the raw mate­ri­als — dough, toma­toes, and cheese — that one can use to make a pizza at home — would they be taxed if pur­chased together? (Soft drinks, I imag­ine, are a legal clas­si­fi­ca­tion of con­sumer goods, but I can­not con­firm that.)

The pro­posal to tax pizza is likely a hypoth­e­sis argued by aca­d­e­mics that would likely never see the light of a legislature’s day, but the prob­a­ble eco­nomic and tax­a­tion impli­ca­tions are inter­est­ing to consider.

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