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Taxes And Inelastic Goods

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"Taxes And Inelastic Goods"

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There’s not a ton of evidence out there, but what evidence we do have suggests that a tax on fatty foods such as the one Denmark is about to implement is unlikely to drastically change behavior. That makes sense. One reason people get so upset when grocery prices go up is that people aren’t really inclined to radically alter their meal behavior in response to modest price changes. They just eat the losses and grumble.

Still, as tax policy, that’s not necessarily a terrible thing.

The thing about Denmark is that it’s a very high tax country. It’s just been governed for a decade by an anti-tax center-right coalition government, whose big achievement was to get total taxes down to 50 percent of GDP. In the United States, I think the Progressive Caucus would laugh at you if you suggested making taxes that high. And now the Social Democrats just won an election and are coming back in office. Higher spending and higher taxes are, naturally, on the agenda. When seeking new sources of tax revenue, something like a tax on unhealthy foods has a lot of appeal. On the one hand, most people probably won’t change their behavior much in response to a tax, which means it’ll raise plenty of revenue. On the other hand, if people do change their behavior, the social consequences will be beneficial. The Nordic countries have become the world leaders in combining high levels of public services with strong economic growth precisely by being pretty relentless at seeking out economically efficient ways to raise tax revenue.

Something relevant to the U.S. debate is that the basic logic of a Financial Transaction Tax is actually quite similar. Such a tax will hardly kill off financial markets speculation, but that’s precisely the point — people will pay the tax and it’ll raise a chunk of revenue. But on the flipside, if it does somewhat discourage certain kinds of rapid asset-flipping, it’s not some tragic loss for our living standards.

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