Will a Fat Tax Work? Will a Fat Tax Work?

BACKGROUND Of the many proposals to counter the obesity epidemic, the most contentious is the use of the “fat tax”. Previous investigations of the efficacy of price-based initiatives in altering consumption behavior have yielded contradictory findings. METHODS We use six years of milk sales data from 1,500 stores to investigate whether price incentives induce substitution to healthier alternatives. Retail prices of milk are either uniform across fat content level, or non-uniform decreasing with fat content. The prevailing price structure is determined at the chain level, and is independent of local demand conditions. This exogenous variation provides a natural quasiexperiment to analyze the impact of small price differences on substitution across fat content. RESULTS When prices are uniform, whole milk has the highest market share at 36.4%. Under non-uniform prices, 2% milk is on average 14 cents cheaper than whole milk, and whole milk share falls to 29.7%. Under uniform prices, whole milk share for the lowest income quartile exceeds the highest income quartile by 17 percentage points. As the whole milk premium over lower-fat alternatives increases, whole milk share for both income groups falls, but the response is stronger for low income consumers. The discrepancy in market shares between income groups disappears with a whole milk premium of 15-20%. CONCLUSIONS We find that within-category demand for milk is highly elastic suggesting that taxes, if reflected in shelf prices, can serve as an effective mechanism to shift choices toward healthier options, particularly amongst lower income consumers. 1 Booth School of Business, University of Chicago, Chicago, IL. 2 London Business School, London, England. 3 Stern School of Business, New York University, New York, NY. 4 To whom correspondence should be addressed: [email protected] 3 Obesity has reached epidemic proportions in the US, two-third of adults and one in three children are overweight or obese (1) (2). Obesity has been linked to an increased risk of conditions such as heart disease and diabetes (3), and is estimated to cause 112,000 deaths every year (4). In addition to compromising individual health, it imposes significant externalities through productivity losses and healthcare costs. Estimates put obesity-related medical expenditures as high as $147 billion per year, half of which are paid by taxpayers in the form of Medicare and Medicaid (5). Estimates on the economic costs related to productivity losses due to obesity are even higher. A recent report in the Lancet estimates a loss of 1.7 to 3 million productive person-years in working US adults, representing economic costs of $390-580 billion (6). Given the individual and societal costs associated with obesity, the issue has received attention from healthcare professionals, social scientists, and public officials. Its global impact prompted the U.N. to highlight it as a risk factor in a high level meeting to address the prevention and control of non-communicable diseases (7). Recommendations to curb obesity rates have ranged from modification of food labels to educational programs promoting healthier lifestyles (3) (8) (9). Among these interventions, the most contentious is the use of the so-called “fat tax” to discourage consumption of unhealthy products (10) (11). Proponents of the measure point to successes achieved in combating tobacco use, and the potential to use tax revenues to offset other obesity-related costs (12), (13). Ideological opposition has come on the grounds of personal responsibility versus the role of government, as well as the regressive nature of the policy (14) (15) (16). Recent attempts to impose taxes on carbonated and sweetened beverages faced stiff opposition from the beverage industry that spent millions of dollars on lobbying and