Obesity in America and the Obesity in America and the “Twinkie Tax”:“Twinkie Tax”:

An Analysis of a Proposed Policy to Encourage An Analysis of a Proposed Policy to Encourage Healthier Food ChoicesHealthier Food Choices

Emily KearneyEmily KearneyJune 4, 2007June 4, 2007

The Obesity PandemicThe Obesity Pandemic United Nations, 2000United Nations, 2000

For the first time, more people are obese (1 B) For the first time, more people are obese (1 B) than malnourished (800 M)than malnourished (800 M)

In just two decades,1980-2000...In just two decades,1980-2000... Obesity rates doubled for American adults and Obesity rates doubled for American adults and

tripled for children.tripled for children.

Obesity is a risk factor for many diseasesObesity is a risk factor for many diseases Costs to the individual and societyCosts to the individual and society

$117 B ($61 B direct costs, $56 B indirect)$117 B ($61 B direct costs, $56 B indirect)

Economic Perspectives on Economic Perspectives on ObesityObesity

Why are we suddenly so obese?Why are we suddenly so obese? More calories consumed, less burned, or bothMore calories consumed, less burned, or both Technology (lower food prices and less exercise)Technology (lower food prices and less exercise)

U.S.- 10% of disposable income on foodU.S.- 10% of disposable income on food lowest in industrialized world, cheapest foodlowest in industrialized world, cheapest food

Economic viewEconomic view- obesity is efficient for individual?- obesity is efficient for individual? People will maximize utility WRT budget, timePeople will maximize utility WRT budget, time Behaviors will change when benefits exceed costsBehaviors will change when benefits exceed costs Do we need financial incentives (tax) to internalize Do we need financial incentives (tax) to internalize

the costs of obesity to create behavior changes?the costs of obesity to create behavior changes?

Policy Measures: Theory and Policy Measures: Theory and Practical ConsiderationsPractical Considerations

Several states already have/had a tax but face Several states already have/had a tax but face industry pressures to eliminateindustry pressures to eliminate Similar to other “sin taxes”: internalize costSimilar to other “sin taxes”: internalize cost

In theory… In theory… Will induce behavior change by providing incentives Will induce behavior change by providing incentives

to eat healthier foods (cheaper relatively)to eat healthier foods (cheaper relatively) Tax revenues could be earmarked for nutrition Tax revenues could be earmarked for nutrition

education programseducation programs

So So wouldwould a tax induce behavior change and a tax induce behavior change and raise revenues? What does evidence suggest?raise revenues? What does evidence suggest? would it be equitable? efficient? effective?would it be equitable? efficient? effective?

Elasticity of Demand for Snack Elasticity of Demand for Snack FoodsFoods

……there are four practical economic questions there are four practical economic questions that must be addressed (Kuchler et al. 2005)that must be addressed (Kuchler et al. 2005)

First, how would such taxes change diets? First, how would such taxes change diets? Second, how much of a tax would be Second, how much of a tax would be

collected? collected? Third, how big is the excess burden? Third, how big is the excess burden? Finally, on which consumers would the Finally, on which consumers would the

burden be imposed? All four questions burden be imposed? All four questions depend on the price elasticity of demand for depend on the price elasticity of demand for snack foods (2005:9)snack foods (2005:9)

Poverty, Energy Cost and Poverty, Energy Cost and ObesityObesity

Multiple studies on effect of income level Multiple studies on effect of income level on diet quality…on diet quality… Disproportionate rates of obesity among Disproportionate rates of obesity among

poor poor

Drewnowski and Specter 2004-Drewnowski and Specter 2004- inverse relationship between energy costs inverse relationship between energy costs

and energy densityand energy density ““the association between poverty and the association between poverty and

obesity may be mediated…by the lower cost obesity may be mediated…by the lower cost of energy-dense foods and reinforced by the of energy-dense foods and reinforced by the high palatability of sugar and fat” (2004:6)high palatability of sugar and fat” (2004:6)

Poverty, Obesity, and Energy Cost

Elasticity and Income LevelElasticity and Income Level

Consumers with higher incomes are less responsive to changes in prices

Empirical Evidence: Empirical Evidence: Kuchler et al. 2005Kuchler et al. 2005

Two regressionsTwo regressions 1) Establish elasticities of demand for different 1) Establish elasticities of demand for different

foods (potato chips, all chips, all salty snacks)foods (potato chips, all chips, all salty snacks) 2) Predict decreased consumption and tax 2) Predict decreased consumption and tax

revenues at different tax rates (1, 10, 20%)revenues at different tax rates (1, 10, 20%)

Results:Results: Demand is inelastic (potato chips, -.45)Demand is inelastic (potato chips, -.45)

Even high taxes would not change consumption Even high taxes would not change consumption much. Low taxes would still generate considerable much. Low taxes would still generate considerable revenue.revenue.

Question the effectiveness of education programsQuestion the effectiveness of education programs

Empirical Evidence: Empirical Evidence: Schroeter et al. 2005Schroeter et al. 2005

Criticize Kuchler et al. Criticize Kuchler et al. Increased price may reduce demand but won’t Increased price may reduce demand but won’t

lead to weight loss if substitutes availablelead to weight loss if substitutes available what would the tax have to be to reduce what would the tax have to be to reduce

weights to 1960 levels? Use “price-weight weights to 1960 levels? Use “price-weight elasticities”elasticities”

ResultsResults A 1% tax would lower female weight A 1% tax would lower female weight

by .44% and male weight by .31%by .44% and male weight by .31% 0.72 lbs; 0.59 lbs for avg female, male0.72 lbs; 0.59 lbs for avg female, male

To reduce to 1960 levels, men’s To reduce to 1960 levels, men’s consumption of snack foods would have to consumption of snack foods would have to be taxed 41% and women’s 34%.be taxed 41% and women’s 34%.

ConclusionsConclusions Would have an impact if….Would have an impact if….

Well-targetedWell-targeted Demand is elasticDemand is elastic Consumers have a choice to switch to healthier Consumers have a choice to switch to healthier

foodsfoods More studies needed of elasticities of More studies needed of elasticities of

demand for foods potentially taxeddemand for foods potentially taxed Especially important is to investigate how people at Especially important is to investigate how people at

different levels of income would be affecteddifferent levels of income would be affected Potential for subsidies to low-income consumers to Potential for subsidies to low-income consumers to

offset burden of tax? Are substitutes available?offset burden of tax? Are substitutes available?

More studies needed on effectiveness of More studies needed on effectiveness of nutrition education programsnutrition education programs

ConclusionsConclusions

““In the In the worst worst case (elastic poor and case (elastic poor and inelastic rich consumers and large income inelastic rich consumers and large income disparities), a tax on food may do little about disparities), a tax on food may do little about obesity and increase undernourishment….obesity and increase undernourishment….

In the In the bestbest case (high level of equality, low case (high level of equality, low food demand responsiveness), it will have a small food demand responsiveness), it will have a small impact on obesity…and be an effective means to impact on obesity…and be an effective means to collect money that could be used to finance collect money that could be used to finance programs for nutrition education” programs for nutrition education”

-Schmidhuber 2004: -Schmidhuber 2004: 282282

ReferencesReferences

Drewnowski, A. and S.E. Specter, “Poverty and Obesity: The Drewnowski, A. and S.E. Specter, “Poverty and Obesity: The Role of Energy Density and Energy Costs,” Role of Energy Density and Energy Costs,” American Journal of American Journal of Clinical NutritionClinical Nutrition, 79, 2004, pp. 6-16., 79, 2004, pp. 6-16.

Kuchler, F., Tegene, A., and J.M. Harris, “Taxing Snacking Kuchler, F., Tegene, A., and J.M. Harris, “Taxing Snacking Foods: Manipulating Diet Quality or Financing Information Foods: Manipulating Diet Quality or Financing Information Programs?” Programs?” Review of Agricultural Economics, Review of Agricultural Economics, 27(1), 2005, pp. 27(1), 2005, pp. 4-20.4-20.

Schmidhuber, J., “The Growing Global Obesity Problem: Some Schmidhuber, J., “The Growing Global Obesity Problem: Some Policy Options to Address It,” Policy Options to Address It,” Electronic Journal of Agricultural Electronic Journal of Agricultural and Development Economicsand Development Economics, 1(2), 2004, pp. 272-290., 1(2), 2004, pp. 272-290.

Schroeter, C., J. Lusk, and W. Tyner, “Determining the Impact Schroeter, C., J. Lusk, and W. Tyner, “Determining the Impact of Food Price and Policy Changes on Obesity,” Ph.D of Food Price and Policy Changes on Obesity,” Ph.D Dissertation in Department of Agricultural Economics, Purdue Dissertation in Department of Agricultural Economics, Purdue University, 2005.University, 2005.