Effect of prices on nutrition: Comparing the impact of product- and nutrient-specific taxes

(Harvard School of Public Health)
(Harvard School of Public Health)

Obesity is regarded as a main driver of rising medical costs in the United States. Estimates suggest that annual medical costs due to obesity amounted to $147 billion in 2008. Mexico has recently surpassed the United States in obesity levels according to a U.N. report, but the obesity levels in the United States remain alarming. In 2012, the Centers for Disease Control and Prevention reported that 35.7% of U.S. adults, more than one-third, were obese.

Given its implication for health and welfare, the fight against obesity is gaining traction among policy makers. The existence of food deserts, areas which lack access to healthful food, has been pointed out as a reason for obesity. More generally, a diet rich in fat, sugar and salt is attributed to high obesity rates. In an attempt to curb demand for sugary drinks, which are thought to be especially detrimental, the idea of taxing soda has been put forward in some municipalities, most recently in San Francisco. For a sense of the research field, data and arguments, see this policy brief from Yale’s Rudd Center for Food Policy & Obesity.

A 2014 study for the National Bureau of Economic Research, “The Effect of Prices on Nutrition: Comparing the Impact of Product- and Nutrient-Specific Taxes,” analyzes the impact of different food taxes on diet decisions. The authors — Matthew Harding of Stanford University and Michael Lovenheim of Cornell University — compare taxes on specific products such as soda drinks with taxes on certain ingredients in products such as sugar, fat and salt. They use data records on more than 123 million food purchase transactions from the Nielsen Homescan database and information obtained from Gladson and FoodEssentials in order to match nutritional information, food purchase behavior and socioeconomic status. On the basis of this integrated dataset, the scholars model the demand and demand elasticities for different food items.

The key findings include:

  • A 20% tax on fat “reduces caloric intake by over 19% (18,984 calories), reduces fat purchases by 30.25% (1,424.5g), decreases cholesterol by 10.83% (1,223.5g), and reduces sodium by 10.63% (19,913.5mg). Despite these large changes, average indirect utility only declines by 2%.”
  • With a 20% tax on sugar, “monthly sugar consumption would drop by 16.41% (1,211.1g), with a 18.54% (18,302.4) decline in total calories. The effect on fat and salt also are sizable, at 12% and 9.63% respectively.” The decrease in utility — generally speaking, the level of perceived usefulness and satisfaction with the product — in response to a 20% sugar tax is 2.6%.
  • A 20% tax on soda reduces soda expenditure by 3.92%. The intake of calories declines by 4.84% (4,779 calories). “These changes translate to a reduction in caloric intake from soda by the equivalent of about 16 cans of Coca-Cola per month.” The average decline in indirect utility due to expenditure and price changes provoked by the tax is 2.5%.
  • Due to substitution effects — the ability to merely switch to another brand of soda, for example — increasing the price of an unhealthy good does not necessarily lead consumers to switch to more healthy options. Higher soda prices may just increase the demand for various other unhealthy food items.
  • Shares of fruits and vegetables, packaged meals and candy increase with income, while soda, meat and milk purchases decline with income. “Wealthier households spend over 7% more of their budget both on fresh fruits and vegetables as well as on packaged meals, potentially reflecting the presence of opposing forces: increased health awareness but also higher opportunity cost of time.”

The authors conclude that “nutrient-specific taxes on sugar, fat or salt have much larger effects on nutrition than product-specific taxes on soda drinks or packaged food, without causing a larger decline in consumer utility.” The authors explain this result with the much broader base of nutrient-based taxes which make it “more difficult to substitute away from any one good in response to such taxes.”

Related research: The Harvard School of Public Health provides a research brief on the major topics within this area, including the role of marketing, the connection between sugary drinks and weight, and more.

Keywords: nutrition, consumer affairs

Last updated: February 13, 2014


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Citation: Harding, Matthew; Lovenheim, Michael. “The Effect of Prices on Nutrition: Comparing the Impact of Product- and Nutrient-Specific Taxes," January 2014, National Bureau of Economic Research, Working Paper No. 19781, http://www.nber.org/papers/w19781.