A Ph.D. economics team from University of North Carolina at Chapel Hill seems to think that a tax on pizza and soda would be economic issues that would help society and economic development through making people healthier:
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? I might be wrong, but I think I heard that such a proposal is in the Obama economic policy. After all, peoples’ health can be considered an aspect of environmental economics.
With all due respect towards “Economics for Dummies”:
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.