The negative consequences of putting 'sin taxes' on products when demand is inelastic are well known. Almost invariably, they hurt the poor more than the rich. They encourage black market activity and cross-border shopping. They lead to compensatory purchasing and brand switching. Although it is politically expedient to portray them as 'nudges' designed to improve society or compensate for negative externalities, they typically act as stealth taxes while doing little to reduce harmful consumption.
'Public health' campaigners tend to sweep these drawbacks under the carpet. From their narrow perspective, anything that might improve health is worth doing. Since higher prices can usually be expected to reduce consumption, they have used a variety of computer models to 'prove' that taxing sugar, salt and fat will reduce obesity. Unintended consequences are wished away or dismissed as mere ‘industry arguments’.
Occasionally, however, wishful thinking must come face-to-face with reality. Denmark’s tax on saturated fat was hailed as a world-leading public health policy when it was introduced in October 2011, but was abandoned as an economic and political disaster fifteen months later. Its ignominious demise is discussed in a new IEA report - The Proof of the Pudding: Denmark’s fat tax fiasco - which offers important lessons for politicians in the UK and elsewhere who are under pressure to levy ‘health-related’ taxes on fat, sugar, ‘junk food’ and fizzy drinks.
The economic effects of the fat tax in Denmark were uniformly negative. At least ten per cent of fat tax revenues were swallowed up in administrative costs and it was estimated to have cost 1,300 Danish jobs. The fat tax did, however, raise more money than expected, but this only goes to show that it reduced the amount of high-calorie food sold by less than was anticipated. Opinion polls showed that 80 per cent of Danes did not change their shopping habits at all as a result of the tax. The impact on the nation’s waistline is therefore likely to have been approximately zero. The main effect on shopping habits was to push people over the border to Germany and Sweden where prices were lower.
Unsurprisingly, a regressive tax on food during a recession was not popular with the Danish public. By October 2012, 70 per cent of Danes considered the tax to be ‘bad’ or ‘very bad’ and newspapers routinely described it as ‘infamous’, ‘maligned’ and ‘hated’. Mette Gjerskov, the minister for food, agriculture and fisheries admitted that ‘The fat tax is one of the most criticised policies we have had in a long time.’ Ultimately, Danish politicians weighed the negligible health benefits against the demonstrable social and economic costs and swiftly abandoned it. Few mourn its passing.
Despite the unambiguous results of this natural experiment, public health campaigners in the UK continue to lobby for similar policies. Just four days after the Danes announced the abolition of the fat tax, the National Heart Forum called on the government to introduce a tax on foods that are high in salt, sugar and fat. Two months later, a coalition of 61 organisations demanded a 20p per litre tax on sugar-sweetened beverages (or - as they call them - ‘mini-health timebombs’). Most recently, the Academy of Medical Royal Colleges called for a 20 per cent tax on the same soft drinks. The Academy sheepishly mentioned that Denmark had experimented with ‘a slightly broader plan’, but did not acknowledge that the experiment had ended, let alone explain why.
The ‘evidence-based policy’ of these groups takes no account of what actually happens when their policies are tested in the real world. Concerns about job losses and the cost of living seem to be of no interest to them. Perhaps this is because they do not have to stand for re-election. For politicians, however, Denmark’s fat tax fiasco is a valuable reminder of how economically inefficient, regressive and unpopular such policies are. Denmark has since announced that it will abolish its hated fizzy drinks tax and is cutting beer duty for the same reason it dropped the fat tax - to ‘promote growth and employment’. Politicians should take heed of this real world evidence rather than listen to single issue campaigners and their optimistic computer models.
The Proof of the Pudding: Denmark’s fat tax fiasco can be downloaded here.