FAT TAXES AND THIN SUBSIDIES: New evidence that health and wealth inequalities will rise not fall

Taxes that make unhealthy food more expensive and subsidies that make healthy food more affordable appear to be an attractive way to address growing concerns about obesity and diet-related diseases. But research published in the September 2017 issue of the Economic Journal suggests that these sorts of policies could have unintended and undesirable financial effects on some of the most impoverished people in society.

The study by Professor Jayson Lusk and colleagues explores how price policies differentially affect women at different points in the income distribution. It is motivated by two common assumptions that often underlie so-called fat-tax/thin-subsidy proposals:

• First, it is typically assumed that the poor consume less healthy diets than the non-poor, perhaps due to the higher costs of more healthy diets.

• Second, it is assumed that price policies are more likely to benefit low-income consumers because they have more room for improvement – and that, because of their financial situation, they are likely to be more responsive to price changes.

In short, a common view is that price policies can help the poor ''catch up'' to the non-poor in terms of the healthiness of their diets. The new findings contradict this line of reasoning. Indeed, they suggest that health inequality as well as economic inequality could rise.

Experiments conducted with French women using real food and real money confirm the first assumption: those who are poor tend to purchase less healthy food than those who are non-poor. The implication is that holding initial consumption patterns constant, policies that tax unhealthy food and subsidise healthy food will be regressive, favouring the non-poor more than the poor.

But people can change consumption patterns in response to price policies. If the poor are more responsive to price policies than the non-poor, then inequalities will be dampened.

The experimental evidence rejects this hypothesis. Behavioural adjustments to the price policies amplify rather than dampen the divergent fiscal impacts of the price policies.

In reality, the research shows that tax/subsidy policies serve to widen the gap between the poor and non-poor, increasing the inequalities in health and fiscal outcomes. Fat taxes cause the poor to pay disproportionally more for food than the non-poor and thin subsidies primarily flow to the non-poor. These effects occur because the non-poor already consume healthier diets, but also because the non-poor are more responsive to price changes than the poor.

The new research is unique and innovative in its approach. The advantage of the experimental approach is that people''s choice behaviours are directly observed (rather than inferred as in a simulation study).

In addition, the setting does not require the use of statistical models to infer how consumers will behave. Each individual can respond in their own unique way according to their own preferences.

Moreover, the experiment measures the overall fiscal effect (based on a whole day''s food choices) rather than simply focusing on one or two foods or a few food product categories.

The experimental environment also allows the researchers to study larger price variations – plus or minus 30% – than would be feasible outside the lab, and as such, it makes the price changes particularly salient.

Whatever health benefits might be created by fat-tax/thin-subsidy policies, this research suggests that they need to be weighed against the adverse monetary effects that they have on some of the poorest people in society.

''Distributional Impacts of Fat Taxes and Thin Subsidies'' by Laurent Muller, Anne Lacroix, Jayson Lusk and Bernard Ruffieux is published in the September 2017 issue of the Economic Journal. Laurent Muller and Anne Lacroix are at the French National Institute for Agricultural Research (INRA). Jayson Lusk is Professor and Head of the Department of Agricultural Economics at Purdue University. Bernard Ruffieux is at the University of Grenoble.