Tuesday, October 4, 2011

Danish fat tax is the biggest loser

This past weekend Denmark became the first country to place a tax on fatty foods. Worried that Danes are getting fatter, the outgoing government imposed a tax on the saturated fat content of food items. Over the past few weeks, Danes have been hoarding butter, bacon and precooked foods.

The stated aim is to reduce the demand for foods with high levels of saturated fats. Or, maybe the aim was to find a new source of revenue for the government.

Either way, the fat tax is a bad solution looking for a problem.

The purpose of a tax is to raise revenue, not to promote social policy.

If the tax is designed to reduce consumption of saturated fats, it won't be the revenue raiser the government hopes. If the tax is designed to increase revenues, it won't make people forgo fatty foods. The goals are mutually exclusive.

To raise revenues the tax must be low enough that it won't discourage Danes from buying fatty foods. If the tax doesn't alter Danish food buying habits then it will have failed its social purpose.

On the other hand, to discourage Danes from eating fatty foods, the tax must be high enough to make folks look for less expensive alternatives. If Danes begin to look at the marginal cost of that pizza or slab of bacon when deciding what to buy, the tax will not bring in the projected revenues.

And then there's Germany and Sweden - both within driving distance of most Danes. Sure, you might have to drive a couple of hours out of your way, but you can still purchase fatty foods without being taxed for it across the border. And that kind of behavior is a double-whammy to Denmark - not only will the tax not reduce the intake of fatty foods, another country will be enjoying the revenue from increased sales of food items.

All in all, an idea that leaves a sour taste in everyone's mouth.

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