Overindulging in food, especially the wrong type of food has immense repercussions on one’s health. Moreover, it could negatively impact the people around you. Initially this essay aims to briefly weigh in on the merits of imposing a ‘fat tax’ in South Africa. This blog post will then proceed by analyzing the economic incidence before concluding by looking at the optimality of the tax.
The argument that obesity is a public problem within a democracy is untenable. This is because individuals are a product of their own lifestyles and choices and therefore government intervention would be superfluous (Stastny, 2004). Furthermore, it is argued that the South African government has far more significant challenges to deal with other than obesity. These issues include education and the high unemployment rate.
The argument for government intervention through a ‘fat tax’ is argued on the basis of market failure. This market failure stems from the difference between the individual costs of obesity relative to the higher costs on the public healthcare system and society. Therefore, a ‘fat tax’ would increase the cost of consuming unhealthy foods and dis-incentivize being obese. This should ultimately lead to an improvement in people’s health and the subsequent reduction of the strains on the public healthcare system. Furthermore, it would generate much-needed revenue for the government (The Economist, 2012).
The incidence of a tax is dependent on the elasticities of supply and demand (Rosen, 2010). That said the poor in South Africa spend 34% of their income on food relative to the rich who spend 10% of their income on food (Statistics South Africa, 2014). Therefore, the poor have a relatively more inelastic demand for food as they spend more on it. Broadly speaking, the economic incidence from a fat tax would therefore fall a lot more on the poor consumer relative to the rich consumer. Therefore, it can be concluded that a ‘fat tax’ would be regressive (Rosen, 2010).
Using Sandmo’s (1974) framework, a ‘fat tax’ on unhealthy food will affect labour as consumers shift demand towards more manufactured goods. This coupled with a decrease in firm’s profits would lead to a decrease in the demand for labour and subsequently increase unemployment and a significant excess burden. Furthermore, Slemrod (1989) emphasized the collection of tax revenue whilst simultaneously minimizing the administration costs as a means of achieving optimality. However, a cheaper alternative would be legislating that, manufacturers supply the relevant health information on packaging and through advertising at their own expense. Finally, Diamond and Mirrlees (1971) stated the marginal tax rate at the highest level of income should be zero to achieve optimality and decrease the distortions. However, a ‘fat tax’ is regressive and therefore this condition will not be able to be easily met, as the rich are able to substitute towards other goods.
This blog post argued that the merits for a ‘fat tax’ are solely based on the market failure argument. Moreover, it emphasized the fact that a ‘fat tax’ was regressive and not optimal as the poor burden fell more on the poor people. Therefore it is clear that a ‘fat tax’ is not the best tool available to counter the obesity problem within South Africa and that a solution should be sought out elsewhere.