Bad habits, hard choices

They’ve arrived! My copies of in the Perspectives series on how to design and implement a smarter tax system.

Bad Habits, Hard Choices

Bad Habits, Hard Choices

I wrote about it yesterday, and one comment on the post observed that surely taxing unhealthy foods more and healthy foods less is regressive, because people with not much income have unhealthier diets.

Yes indeed, if you assume people’s behaviour does not change at all in response to either price incentives or other incentives. David argues in the book that the present structure is unfair exactly because it harms the health of people with lower incomes. He draws also on behavioural economics to discuss how being nudged not only by post-tax prices but also by packaging information etc could encourage people to make healthier choices. Koen’s comment also argued that we don’t know which foods are unhealthy and this might not be inherent – as indeed has been said in the context of the sugar tax debate. A little is ok, it’s eating/drinking a lot that’s the problem. The book does also address this in its discussion of implementation, strongly advocating some trial and error.

I have reservations about behavioural economics and paternalism, or rather about the gung-ho enthusiasm with which economists are wielding this new tool in our toybox, but I do think makes a strong case for restructuring VAT. And this is surely a good moment to be thinking seriously about the tax system as a whole and whether it’s helping or harming society.

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2 thoughts on “Bad habits, hard choices

  1. I do look forward to a more detailed review of the book. It’s certainly good to hear it advocates trial and error, rather than a blunt raise of VAT on bad foods.

    In my view, using a sales tax as a disincentive for certain behaviours is inherently precarious. As you say, “a little is OK, it’s eating/drinking a lot that’s the problem”. VAT, conventionally, is a blunt instrument that linearly penalizes consumption: consume twice as much means paying twice the tax. Yet the behaviour that is intended to be discouraged is not linear. This means that the tax is too high at low levels of consumption and too low at higher levels – irrespective at what level the tax is set. And it is the less-well off that will suffer most under a too-high taxation even when their consumption is modest, since the tax is a disproportionate part of their budget.

    The experience with tobacco is also less than promising: very high duty and VAT seem to have little effect on the behaviour of both existing smokers, and people taking up smoking still.

    I often quote Steven Landsburg in discussions on behavioural change: “People respond to incentives – the rest is commentary.” However, I feel compelled always to add that things are generally a bit more complex. Incentives work, in general, but the specifics matter.

    And in the case of ‘bad foods’ the specifics are pretty complex. I’d be very interested to see how a simple, blunt intervention like raising VAT on certain foods can strike the right balance between helping people control their diet on the one hand, and not restricting harmless consumption and weighing unduly on the budget of the less well-off.

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