Optimal Taxation and Food Policy: Impacts of Food Taxes on Nutrient Intakes

1.  Optimal Taxation and Food Policy: Impacts of Food Taxes on Nutrient Intakes New Directions in Welfare – OECD, Paris – July 2011 Thomas Allen (University of Perpignan, CIHEAM/IAMM-MOISA and INRA-ALISS) Olivier Allais (INRA-ALISS) Véronique Nichèle (INRA-ALISS) Martine Padilla (CIHEAM/IAMM-MOISA)

2. Outline of the presentation • Background • Research objectives • Methodology • Results • Discussion

3. Background Increase in the prevalence of obesity and overweight in France since 1990 (Obépi, 2009); Higher risk of illnesses for which nutrition is an essential determinant, among the low-income groups (InVS, 2006) Nutrient-rich food are associated with higher diet costs and energy-dense food with lower costs (Darmon et al., 2007); Public Health authorities’ questioning and academic discussion on the prospect of potential « fat taxes ».

4. Research Question How best to design a fiscal policy improving households’ allocation of goods in terms of nutrient adequacy to recommendations?

5. Objective Identify the optimal price conditions improving households’ diet quality.

6. Review of the Litterature • Food consumption economics : Estimation of a food demand system to capture price elasticities (Deaton et al.) • Health studies : Definition of the public health question and tools of analysis (Drewnowski et al.) • Public economics: Modelisation of the optimal taxation conditions (Ramsey,Murty et al.)

7. Optimal taxation modelRamsey's model (1927) • Taxes' objective: Raise funds. • Planner's ojective: Maximise social welfare under the constraint that tax revenue covers a given level of public expenditure. s.c.

8. Optimal taxation modelInverse elasticity rule Ramsey rule: The reduction in demand for each good, caused by the tax system, should be proportional for each good. Inverse elasticity rule: Optimal tax rates on each good should be inversely proportional to the good’s own–price elasticity of demand.

9. Optimal taxation modelApplication to a nutritional policy objective Taxes' objective:Transforming consumption behaviours. Planner's objectif: Maximise social welfare under the constraint that the overall diet quality of consumers' food basket reach a minimum level in terms of nutrient adequacy to recommendations. s.c.

10. Optimal taxation modelA nutritional quality/price ratio Optimal financing criteria : The optimal tax rates, for each good, are decreasing functions of their own-price elasticity of demand. Optimal adequation criteria: The optimal tax rates, for each good, are decreasing functions of their « nutritional quality/ price » ratio.

11. Optimal taxation modelSystem of simultaneous equations • The maximization program results in a system of equations where each optimal price variation, tk, : Where quali, p and x are vectors of the diet quality indicators, initial prices and quantities associated with each good and e the own and cross price elasticities. • Solving this sytem requires to estimate a complete food demand system.

12. Methodology – Demand modelA conditionally linear system Selection of the Almost Ideal Demand System model (Deaton and Muellbauer, 1980): Iterated Least Square Estimator (Blundell and Robin, 1999).

13. Methodology – Pseudo-Panel Data • A panel of scanner data: - 156 periods: 1996-2007 - 8 cohorts: Date of birth/Social status - 27 food groups • Group agregation: Homogenous categories in terms of nutritional content (fruits/vegetables fresh/processed, snacks/already prepared meals, vegetable/animal fat, salty/sugary fat). • Price construction: 24 clusters of price according to Localisation/Social status.

14. Methodology - Nutrient adequacy indicators • MAR: • LIM: • SAIN:

15. Nutrient adequacy indicatorsMAR - Mean adequacy ratio The MAR for a 100g of food i: The MAR for a food basket:

16. Nutrient adequacy indicatorsLIM – Score des composés à limiter The LIM for a 100g o food i: The LIM for a food basket:

17. Nutrient adequacy indicatorsSAIN – Score d’adéquation individuel aux recommandations nutritionnelles The SAIN for a 100g of food i: The SAIN for a food basket:

18. Results – Price elasticty of demand Uncompensated own-price elasticities • Statistically significant. • Negatives. • Low and inelastic. • Within usual range.

19. Simulations – Optimal taxation MAR • Goods to tax: Fish, meat, poultry, deli meat, snacks, sugar, animal fat, beverages • Goods to subsidize: Fruits and vegetables, yoghurt, milk, cereals and starches, potatoes, vegetable fat and salty snacks

20. Simulations – Optimal taxation LIM • Goods to tax: Fruits and soft drinks, deli meat, snacks, mixed dishes, dairy products, cereals and starches, vegetable and animal fat, sweets and salty snacks. • Goods to subsidize: Fish, meat, poultry, vegetables, potatoes, water coffee and tea and alcoholic beverages.

21. Simulations – Optimal taxation SAIN • Improvements once calorie intakes are taken into consideration: • Mixed dishes are to be taxed; water to be subsidized. • Meat are more heavily taxed; fruits and vegetables more heavily subsidized.

22. Fiscal incidence Welfare losses homogeneously spread over all income groups.

23. ConclusionResults and policy implications Theoretical result: A « diet quality/price » ratio and an augmented inverse elasticity rule; Empirical results: Mixed evidence supporting food taxation: - Low price elasticities and high tax rates; - Weak convergence on food groups to tax/ subsidize accross nutrient adequacy indicators.

24. Appendices

25. Methodology – Optimal taxation (2) Use of the Lagragian Method to obtain a system of n+2 linear and non-linear equations and n+2 unknowns. with

26. Methodology – Optimal taxation (3) • Using the Lagrangian method: with • And assuming a differentiable demand function:

27. Methodology – Optimal taxation (4) • Increasing the MAR objective until the other constraints collapse is equivalent to: • Maximisation Program: s.c.

28. Methodology – Optimal taxation (5) • Maximisation Program: s.c.