Taxing you healthy

A guest review by Koen Smets.

Policymaking is increasingly turning to behavioural insights: the Nudge Unit, set up nearly six years ago in the UK, is going from strength to strength, and numerous other countries have followed suit. So it is remarkable to find a new book advocating a boring, conventional economic instrument to influence consumer behaviour: the tax incentive. In , ‘recovering economist’ David Fell argues for what he calls a ‘SmartVAT’ to make people choose healthier food and drink.

[amazon_image id=”1907994505″ link=”true” target=”_blank” size=”medium” ]Bad Habits, Hard Choices: Using the Tax System to Make Us Healthier (Perspectives)[/amazon_image]

It is a short book, the length and readable style of which belie both the complexity of the subject matter and the radical nature of the core idea: “a bold proposition that goes well beyond a sugar tax or a fat tax.”

To build his argument, Fell introduces a large number of concepts involved in what he sees as problematic consumption: VAT and excise duties, information asymmetry, market theory and consumer choice theory, externalities, commitment strategies and many more. It is impossible to cover them all in depth in a mere 120 pages, but Fell does a remarkable job in the book in describing and illustrating the various – often conflicting – forces at play.

He discusses the fine balance government needs to strike with its surreptitious taxes, managing the disquiet of businesses, media and consumer while still trying to maximize revenue; as Colbert said, “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.” Fell also highlights the limitations of the conventional wisdom that says taxation will depress the demand for taxed goods, for example when the demand is inelastic – as it is for petrol.

However, while Fell may be a self-confessed recovering economist, he is clearly not the kind of two-handed economist who drove Harry Truman to distraction. He paints a decidedly one-handed picture, populated with economists as dogmatic market fundamentalists, food manufacturers as manipulative seducers, and hapless consumers whose choice is restricted to products that deliver the returns demanded by ‘capital’. Even for someone agreeing that the suppliers play a significant role in influencing our consumption habits, this becomes increasingly irritating.

The informed consumer, according to Fell, is as much a myth as the hyper-rational homo economicus. The messages we get are biased, partly due to our own cognitive limitations (few people consult the nutrition labels), and partially because what benefits the suppliers is emphasized. Marketeers extol the virtues of luxury goods (another recurring bugbear), but don’t promote the free and healthy activity of walking – leading to the author’s somewhat bizarre claim that, “Capital doesn’t like it when you walk because it gets no reward.” Would we conclude that, say, the Women’s Institute doesn’t like us windsurfing because it does not promote this activity?

Fell uses his own research in , showing for example that 31% of his sample agrees that they “buy more than they need most times they visit the supermarket”. The vagueness of such surveys (for example, how do we define ‘what we need’?) doesn’t stop him drawing strong conclusions.

In short, the author blames information asymmetry, orchestrated by ‘capital’, as the main cause of obesity, and argues that what we need is a collective commitment device. If, as a society, we agree to subsidize ‘good’ food and slap a hefty tax on ‘bad’ food, then that will help us stick to our commitment to eat more healthily – much like setting our alarm clock tonight commits us to getting up on time tomorrow morning.

Fell sets out a 4-step approach to execute his radical proposal. The first two steps rest on a deliberative process: citizens and experts come to a consensus, not only on what constitutes healthy and unhealthy foods, but also on what the subsidy and tax rates should be. Will this work? Fell refers to a few cases where a similar process was used, but these differ both in scope and scale from what he himself calls a “dauntingly difficult” task.

Once it is clear which goods needs to carry which tax, the third step is quite straightforward: implement the new rates, and make the taxes and subsidies salient at the point of sale. The final step is to correct the mistakes the author believes will inevitably be made.

The author confesses to little confidence in the practical adoption of his plan: too much resistance from vested interests: the dreaded economists, the Treasury, the government, the media… and the consumer. That may be so, but there are two even bigger problems.

Fell’s SmartVAT assumes that consumers are rational, responding to the tax incentives. But citizens are resourceful, as the consumption of tobacco illustrates. It is mostly the less well-off who smoke, which suggests that they drop other purchases in order to be able to buy cigarettes. And if people can find ways of importing cheap smokes (legitimately or otherwise), they will do the same for ‘bad’ foods. Ironically, Fell personally illustrates the futility of raising the cost of unhealthy products: the price of cigarettes has risen twice as fast as inflation in the last 25 years, but he is still buying them.

But the most serious criticism that should be levelled at Fell’s idea is that he attaches no value at all to the pleasure people might derive from consuming foods he considers as unhealthy. There is, in his view, no trade-off to be made, and he explicitly rejects the notion that there are no unhealthy foods, only unhealthy diets. So the majority of people who consume ‘bad’ foods in moderation will be penalized, having to pay more for a harmless form of enjoyment.

It is this disregard for the core of all economic thinking, the trade-off, which makes the book ultimately a disappointment for this reviewer.

Koen Smets is an accidental behavioural economist, who works as an organization development specialist. He uses elements from both orthodox microeconomics and behavioural economics to bring about behavioural change. He is on Twitter as @koenfucius

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Taxing for well-being, not ill-being

Taxation is in the news – and a plug for my colleague Rachel Griffith’s recent RES lecture on the taxation of multinationals is in order given today’s headlines about Google. John Gapper was spot on in his discussion about this in the FT today (£), Alphabet and Apple Spell Global Tax War: “Multinationals, especially US corporations subject to America’s dysfunctional tax laws, stretched rules to the point where the result appals taxpayers.”

Important stuff. But even bigger news is the publication tomorrow of the in our Perspectives series, Bad Habits, Hard Choices: Using the Tax System to Make us Healthier by David Fell.

[amazon_image id=”1907994505″ link=”true” target=”_blank” size=”medium” ]Bad Habits, Hard Choices: Using the Tax System to Make Us Healthier (Perspectives)[/amazon_image]

It’s a highly persuasive argument that the government shouldn’t hesitate to reshape taxation to make good foods cheaper and bad foods dearer. I particularly like this endorsement from David Cadman, Visiting Professor at University College London and the University of Maryland: “The fact that I read, at one sitting, a book on VAT is a tribute to Fell’s ability as a writer.  I liked the book very much – original, informative and well argued.” Of course the recent discussion about a sugar tax is relevant, but David’s case is broader. It isn’t just corporation tax that’s dysfunctional. So is VAT, a large government distortion of market prices contributing to ill-being, not well-being.

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