Fat Tax

The government in Denmark, has introduced additional taxes on foods which contain more than 2.5% saturated fat. It will add 25p on packets of butter, 8p on crisps.

This BBC news clip introduces this new fiscal measure.
The biggest price increases will be seen on fatty staple foods like butter, oils and high-fat dairy products like whipping cream and crème fraiche. But all products with more than 2.3 percent saturated fat – from staples like butter to processed foods like packaged biscuits, cakes and sweets – will soon be more expensive. The extra charge will amount to 16 kroner per kilogram of saturated fat. According to the tax ministry’s calculations, a 250g package of butter will wind up costing 14.1 percent more, while the price of a litre of olive oil will rise 7.1 percent.

It is possible that the fatty foods are demerit goods, but is the tax big enough to change the behaviour of consumers in the long term, or is there a risk of government failure, if purchases of such foods remain largely unchanged. Is this type of indirect tax regressive, hitting lower income groups hardest. In the short run this tax rise might nudge the Danish inflation rate upwards from 2.9%.  Over time, it also alter the behaviour of producers, changing the mix of fats in their ranges of processed foods.

Will the measure by itself impress upon the Danes the merits of a ‘healthy’ diet, or will it also require additional state intervention by way of government advertising, or regulations to change food labelling.

“It’s very interesting. We haven’t had any practical examples before. Now we will be able to see the effects for real.”  Mike Rayner, Director of Oxford University’s Health Promotion Research Group said in an interview with The Daily Telegraph.. Given that the UK has a significantly larger proportion of obese adults, pressure groups and politicians may argue that Britain could benefit from a similar tax.

Given that Denmark has a large efficient dairy industry, and obesity levels of 10% it is a ‘brave decision’. It does beg questions about the ability of governments to accurately calculate optimal socially beneficial levels of consumption.Should governments intervene in the first place? This video clip of an interview last year with one of the UK’s Health Ministers raises a number of issues about policy options for demerit goods.

If saturated fat is deemed to be a demerit good, what then about sugar?