Wednesday, June 30, 2010

Eating Sugar and Being Taxed



Greg Mankiw wrote a New York Times article a few weeks ago about the relevance of taxing sugar eaters. The piece was followed up by a blog as the article illicited some reaction from David Leonhardt also in the New York Times.

In the end, these folks were arguing that maybe taxing sugar might not be such a good idea after all because it postponed death and people (obese people in their articles) cost more money when they are alive than when are dead. Although all these people's arguments are logical they do not pass my "reality check" test and I wrote Greg Mankiw to tell him the following:

I am sending you a chart (above) depicting the health care cost per capita per age category for Canada. The chart seems to be strongly making the point that dying young could indeed save a lot of money to society and taxpayers.

But this is the fallacy of the average. Nothing says that the chart is identical for everyone.

In fact, it is very likely that the "cost chart of an obese person" is similar to a that of a healthy individual but that that all the health costs of the obese people are incurred early and skewed into the 0-65 years range time frame.

This would mean that because the cost would be incurred earlier we would have to discount the health costs of an obese person versus that of a healthy one living longer in order to truly compare them.

Short term interest rates might be close to zero but long term interest rates are not (especially real interest rates) and there is a significant risk of getting much higher rates in the future.

In other words, it might be more expensive to die early.

I am not saying that I have the definite answer. I do not.

I think that a more rigorous cost-benefit analysis should be done before we pronounce ourselves one way or another.

You claim that there is evidence of lower health care costs for smokers. It is possible. I have not seen the study.

But before claiming that the death of obese people is an attractive proposition (and we are strictly talking finance here), I would study the phenomenon a little more.

The fallacy of the average often plays tricks on our mind.

I will grant you that a healthy citizen who dies instantly in a car accident upon retirement at age 65 is probably providing benefits to society (again strictly from a financial point of view).

Yet, nobody is advocating that we should not be wearing our seat belt for financial reasons and we never see headlines such as "Seat belt laws are costing tax payers a bundle".

Cheers,

Luc

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