Fighting the fat

Denmark's 'Fat tax' has been repealed but doctors are pushing for a similar tax in the UK backed up with supporting measures.

For doctors in the UK the big problem is fizzy drinks, which are basically water and sugar. They want a tax which will arise prices by 20%.

Of course the PED of these drinks might be quite inelastic, but with so many potential substitutes, from juice to water, we might be pleasantly surprised by the effectiveness of such a tax. (However you can see the dentists getting ready to warn us against the effect of acid in fruit juice.)

The problem of fatty and high calorie foods is that they are 'imperfect information goods' and impose significant costs on the consumer and negative externalities on society who must treat their weight related diseases.

So using a price rise alone isn't enough. It is necessary to improve knowledge and directly intervene, such as banning advertising of unhealthy foods and closing take-aways near schools.

The problem of obesity is the 'new smoking'. The 1970's saw us begin to tackle the evils of smoking, but today the threat to peoples health from eating too much is just as serious.

It will take a broad range of measures to solve this. Some will cause a movement along the demand curve, but most will attempt to move the demand curve to the left.

The BBC report the proposals here

Practicalities defeat 'Fat tax'

Denmark introduced the worlds first 'Fat Tax' just over a year ago. It was covered in this blog and got one of the highest number of hits of any post to date.

Now Denmark is scrapping the tax. They say its because it has cost jobs, caused people to go into Germany to shop and inflated prices.

Well taxes do raise price! That's the point. This is a disappointing move as it represents a victory political expediency over economic policy.

It would be nice to find out how much the tax changed behaviour, especially in areas a long way from the German border.

If there is an important lesson to learn it is that a country acting alone can disadvantage itself. This has often be said of acting on carbon emissions and pollution. If you impose higher costs on domestic firms in a market with few barriers to international movement then the result maybe that firms move. So perhaps the answer is a European Fat Tax; good luck convincing David Cameron on that one.

The Daily Mail report the story here

Transfer pricing - legal but is it right?

Today a Parliamentary Select Committee questioned senior executives of Amazon.co.uk, Starbucks and Google as to why their companies pay virtually no corporation (profit)tax.

The firms concerned are able to minimise the profit tax they pay by declaring profits in countries with lower tax rates. It works like this:

Suppose Amazon sells a book in the UK for £20. The book cost £10 from the publisher giving a gross profit of £10. Amazon incurs other costs of £5 running their business in the UK meaning they have made £5 net profit.

So Amazon pay corporation tax on £5 profit? Well that could happen but not if they do it like this:

Amazon UK sells a book in the UK for £20. The book cost £15 from Amazon Luxembourg giving a gross profit of £5. Amazon UK incurs other costs of £5 running their business in the UK meaning they have made no net profit.

Amazon Luxembourg bought the book from the publisher and made £5 profit in Luxembourg which has a lower rate of corporation tax.

Amazon do pay tax where they declare the profit. But by selling goods between subsidiaries they can make the profit appear where they want it to; in the countries that tax least.

This is all totally legal. Amazon, Starbucks and Google are multinational companies and are able to do this, but a firm operating only in the UK can't. Some feel that this is unfair as in my example Amazon UK really made the money by its UK operations and they should pay tax on their real profits here.

As the companies made clear to the committee, they do pay tax. Millions of pounds in payroll taxes such as employers National Insurance Contributions, local Business Rates and VAT. However in these days of poor public finances many will have little sympathy with them.

A Guardian article explaining Amazons actual operation here