Accounting for Product Substitution in the Analysis of Food Taxes Targeting Obesity Accounting for Product Substitution in the Analysis of Food Taxes Targeting Obesity Accounting for Product Substitution in the Analysis of Food Taxes Targeting Obesity

Zhen Miao, John Beghin, Helen Jensen, Zhen Miao, John Beghin, Helen Jensen
We extend the existing literature on food taxes targeting obesity. We systematically incorporate the implicit substitution between added sugars and solid fats into a comprehensive food demand system and evaluate the effect of taxes on sugars and fats. The approach conditions how food and obesity taxes affect total calorie intake. The proposed methodology accounts for the ability of consumers to substitute leaner low-fat and low-sugar items for rich food items within the same food group. This
more » ... food group. This substitution is integrated into a calibrated demand system in addition to the substitution among food groups, using recent food intake data and existing demand elasticities. Simulations of taxes on added sugars and solid fat show that their impact on consumption patterns is understated and the induced welfare loss is overstated when abstracting from the substitution possibilities within food groups. The United States faces a major health problem in the high prevalence of obesity and its underlying cause-an imbalance between energy intake and energy requirements (Ogden and Carroll, 2010; and Ogden et al. 2007) . Obesity is associated with excessive morbidity and raises concerns about determinants of dietary choice. The growing prevalence of obesity and the social costs associated with poor dietary choices motivate government intervention because of externalities. Obesity has significant external effects on the health care system, employers, and other people (Bhattacharya and Bundorf 2005), which are typically not internalized when people make food choices. Health policies aim to encourage individuals to reduce excess calorie intake and choose healthier foods. Policy analysts and policymakers have considered several instruments to induce consumers to more closely adhere to current dietary guidance, including taxes on specific foods and food components. The objective of this article is to explore the consumption and welfare effects of taxes that target two important sources of excess calorie intake: added sugars and caloric sweeteners, and solid fats (Ogden et al, 2011) . 1 These food components are present in various foods. Most of the existing research on food taxes and obesity treat the food groups in a demand system as a composite of food items with a fixed (e.g., average) content of nutrient or food components. This body of research proceeds to assess the effect of the tax on a single target ingredient and the consequent changes on the taxed nutrient. In contrast, very few studies systematically consider sub-categories within food groups or account for the possible trade-off between targeted food 1 Although sugars are found naturally in food, most are "added" during food processing and preparation. The sugars and caloric sweeteners added during food processing, preparation and at the table are referred to "added sugars". Fats that are solid at room temperature are referred to as "solid fats". These fats occur naturally or can be added. Solid fats generally include a high percentage of saturated and/or trans fatty acids. The fat in fluid milk is also considered solid fat (USDA/DHHS 2010).