What is a Pigovian tax? Good question. Thought you’d never ask!
A Pigovian tax is a tax on any thing, any activity, or any product that has a social cost. Common Pigovian taxes are cigarette taxes, alcohol taxes, taxes on gambling establishments, gas-guzzler taxes, carbon taxes. You get the idea. Pigovian taxes are named after the 20th-century English economist Arthur Cecil Pigou, who advocated them. Pigovian taxes are generally considered win-win because not only do they discourage unhealthy behavior, they help pay for the consequences of that behavior.
America is currently undergoing an epidemic of obesity, the long-term health consequences of which may be more severe than any other health challenge we have yet faced. Thus, an excellent argument can be made for calories as a target for a Pigovian tax. Or at least “bad” calories, calories high in sugar and fat and low in nutrition. Do I hear junk food? Processed snacks? How about sodas?
“Among 15 options for paying for health care reform, a new Senate Finance Committee analysis lists a ‘sugar-sweetened beverage excise tax.’… The typical person now consumes 190 calories a day from sugary drinks, up from 70 a day in the late 1970s. That 120-calorie increase represents about one-half of the total daily caloric increase during that span, C.D.C. (Center for Disease Control) data shows…. Of all foods and beverages, says Mr. Brownell, the obesity researcher, ‘the science is most robust and most convincing on the link between soft drinks and negative health outcomes.’” (The New York Times, May 19, 2009, “Sodas a Tempting Tax Target,” below.) Regrettably, our tax policy often encourages the opposite of rational behavior as illustrated by the billions of dollars in current government subsidies for corn syrup.
Mass production and factory-like processing has driven down the cost of many fast foods, particularly relative to the cost of healthy food. The cost of fresh vegetables has risen 41% ABOVE the general rise in the Consumer Price Index since 1978 (and fresh fruits 46%), while the cost of soda is 33% LESS in real terms (and beer 15% less) over the same period. (Source: The New York Times, quoting Department of Labor Statistics.)
Perhaps it’s time for a Pigovian Tax on “bad” calories to balance the food cost scales and nudge us all in the direction we know we should go.
“Sugar, rum and tobacco are commodities which are nowhere necessaries of life, which are become objects of almost universal consumption, and which are therefore extremely proper subjects of taxation.” — Adam Smith, “The Wealth of Nations,” 1776
Sodas a Tempting Tax Target
By DAVID LEONHARDT
The New York Times
Published: May 19, 2009
“Sugar, rum and tobacco are commodities which are nowhere necessaries of life, which are become objects of almost universal consumption, and which are therefore extremely proper subjects of taxation.”— Adam Smith, “The Wealth of Nations,” 1776
That quotation, from the great philosopher of capitalism, appeared at the start of an article that ran a few weeks ago in The New England Journal of Medicine. The article argued for taxing Coke, Pepsi, Gatorade, Red Bull and any other sugar-sweetened beverage, largely to combat obesity.
The authors were Kelly Brownell, a longtime obesity researcher at Yale, and Thomas Frieden, the New York City health commissioner. Since the article appeared, President Obama appointed Dr. Frieden to lead the Centers for Disease Control and Prevention.
So one of the nation’s top public health officials is now a fierce proponent of a soda tax. Meanwhile, other Obama advisers and some Senate staff members have been talking about such a tax — which wouldn’t apply to diet soda or real juice — as a way to help pay for expanded health insurance. Among 15 options for paying for health care reform, a new Senate Finance Committee analysis lists a “sugar-sweetened beverage excise tax.”
Coca-Cola and PepsiCo hate this idea, of course, and they’re fighting hard (if quietly) against it. Given the messy politics of tax increases, the industry seems likely to win this time. But the soda tax has already made the journey from unthinkable to plausible. It isn’t too hard to imagine that, some day soon, Congress or a state legislature will see the tax as the least bad way to raise desperately needed revenue.
Whatever happens, the debate over soda tax is a useful one, because it does a nice job of capturing some of the most serious problems with our current tax system. Not only has the system been failing to collect enough revenue to cover government expenses, but it is also complex in all the wrong ways.
The tax code has layer upon layer of subsidies, deductions, exemptions and extra taxes that serve no good purpose. There is a huge exemption for employer-provided insurance, which has numbed us to the crushing cost of health care and is deeply unfair to people who must buy insurance on their own. There are hotel taxes, because it’s politically easy to tax out-of-towners. And there are taxes that seem to defy all reason, like New Jersey’s tax on health club memberships.
On the other hand, activities that really deserve to be taxed — activities that place a cost on the rest of society — often go untaxed or undertaxed. Economists refer to taxes on such activities as Pigovian taxes, after the 20th-century English economist Arthur Cecil Pigou who advocated them.
Pigovian taxes have the double advantage of discouraging costly activities and helping to cover the costs that remain. Tobacco taxes have become the shining example. Yet alcohol taxes have fallen 35 percent since the early 1990s, adjusted for inflation. We still don’t have a carbon tax or its cousin, a cap-and-trade system. Nor do we have a tax on excess calories.
In coldly economic terms, you can make a case that calories are the single best candidate for a Pigovian tax.
Most public health scourges have a brutal way of holding down the associated medical cost: they kill people. That’s why preventive medicine doesn’t provide nearly the cost savings that some advocates claim. “One of the uncomfortable truths is that when you prevent an illness,” says Dana Goldman, the head of the health program at the Rand Corporation, “you prolong a life and can increase costs.”
Obesity is different. It has only a modest effect on life span, but it causes costly chronic illnesses, like diabetes.
For some people, obesity is a matter of genetic predisposition, and it can’t be prevented. But most of today’s obesity problem is about behavior. The average 18-year-old is only a fraction of an inch taller than the average 18-year-old three decades ago, but 15 pounds heavier. Gene pools don’t change in three decades.
Soda consumption has changed — a lot. The typical person now consumes 190 calories a day from sugary drinks, up from 70 a day in the late 1970s. That 120-calorie increase represents about one-half of the total daily caloric increase during that span, C.D.C. data shows.
Of all foods and beverages, says Mr. Brownell, the obesity researcher, “the science is most robust and most convincing on the link between soft drinks and negative health outcomes.”
Just as important for the purposes of a soda tax, economic research has found that soda drinkers are price sensitive. In the past, when the price of soda has risen by 10 percent, consumption has dropped by an average of roughly 8 percent. This means a soda tax may not be quite as regressive as it sounds, because poor people would end up buying less soda than they now do.
I found these arguments fairly compelling, and I wanted to hear how executives at Coke and Pepsi would respond. But they refused to talk.
Bryan Anderson, the head of Coke’s Washington office, and Dan Bryant, the head of Pepsi’s, didn’t return my calls. Spokesmen for the companies said the industry’s lobbying group, the American Beverage Association, was making all comments.
And it definitely has been making some comments. The association has an unsigned blog that criticizes soda tax proponents as “well-paid professional food police” at “East Coast universities.” One recent entry was devoted to praising Bill Clinton — whose foundation helps run a program that keeps some (but not all) sweetened drinks out of schools and has received money from the industry — for coming out against a soda tax. “Mr. President,” it concluded, “we thank you for being a stand-up guy.”
When I got on the phone with Susan Neely, the association’s president, I tried to get beyond the name-calling and instead asked one question over and over: do you think the increase in sugary-drink consumption is an important reason obesity has increased?
Ms. Neely, in a pleasant tone, wouldn’t answer. She kept answering different questions, like whether soda was the only reason we have gained so much weight.
“I think that we are consuming too many calories from a variety of sources and not getting enough exercise,” she finally said.
It’s certainly true that a soda tax, by itself, won’t solve the multibillion-dollar obesity problem. A true Pigovian approach would be much broader. It would get rid of the current government subsidies for corn syrup — and that New Jersey gym tax. It would use taxes and subsidies to reverse the long-term decline in the price of junk food and the long-term rise in the price of fruits and vegetables. Some economists say health insurance premiums should be lower for people who keep fit.
As Ms. Neely says, “It’s a simple equation — calories in, calories out.”
Indeed it is. We just shouldn’t lose sight of how many of those “calories in” come from Coke, Pepsi and the like. If we could cut back on our soda drinking, we would be both thinner and richer.