Tax Analysts Blog

The Watertight Case for Taxing Everything

Posted on Sep 24, 2009

I have a certain fascination with tax fads. You know what I mean -- those odd, improbable, and sometimes appealing tax ideas that capture the public imagination from time to time. But seriously: this soda tax has got to go away. It was fun for a while, even intriguing. But it's a bad tax -- regressive, incoherent, arbitrary, and annoying. Please, let's stop the madness.

For a while, the soda tax seemed to sink beneath the waves, drowned by consumer complaints and congressional opposition. But then the New England Journal of Medicine (NEJM) swam to the rescue, arguing that three "market failures" surround the consumption of sugary soda:

    1. Imperfect information: People (let's call them short-sighted dopes, since that's the implication of the entire argument) don't understand how bad soda is for their health, so they drink too much of the stuff.
    2. Time-inconsistent preferences: dopes favor short-term gratification over long-term health. (Some of you may know this as the "moments on the lips, forever on the hips" theorem of modern economics.)
    3. Financial externalities: dopes don't shoulder all the costs of their poor consumption decisions, saddling the rest of us with higher medical costs.

    A soda tax would fix these problems, or at least ameliorate their effects. Or so the argument goes. But here's the problem: other behaviors suffer from the same "market failures" as soda consumption. Sex, for instance, according to the Tax Foundation. Or the consumption of other high-calorie treats. I'll sign on for a soda tax when we start taxing the rest of the Happy Meal, too: hamburgers, french fries, ice cream and those damn plastic toys my kids always leave in the back seat.

    Before I finish venting, let me single out for ridicule another passage in the NEJM study.
      A controversial issue is whether to tax beverages that are sweetened with noncaloric sweeteners. No adverse health effects of noncaloric sweeteners have been consistently demonstrated, but there are concerns that diet beverages may increase calorie consumption by justifying consumption of other caloric foods or by promoting a preference for sweet tastes. At present, we do not propose taxing beverages with noncaloric sweeteners, but we recommend close tracking of studies to determine whether taxing might be justified in the future.

    So let me get this straight: according to the obesity-by-false-sense-of-virtue theory, drinking Diet Coke may encourage people to eat more. Therefore, we should tax Diet Coke. By this logic, shouldn't we tax water, too? Or what about taxing not drinking -- a thirst tax? After all, people who aren't drinking anything are presumably avoiding soda calories, too. Go dry at the lunch table and you might scarf down a few more hot dogs (good luck with the buns, though).

    And while we're at it, maybe we should tax exercise, too. Run a few miles in the morning and you probably give yourself license to eat more the rest of the day. Actually, this is no joke -- some studies do seem to suggest that exercise impedes weight loss. At least that's what Time magazine said last month. So how about a mileage-based tax for runners? An excise on gym memberships?

    Look, all kidding aside, every sin tax makes sense to someone. In theory, we could spend a lot of time crafting millions of tiny little taxes designed to compensate for every "market failure" imaginable. But that's the road to fiscal hell.

    The soda tax is a trivial issue, but it points up a bigger problem: our tendency to use the tax system in pursuit of narrow goals. That might be good for the goals, but it's bad for the tax system.

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