When do Fat Taxes Increase Consumer Welfare?

Abstract: Previous analyses of fat taxes have generally worked within an empirical framework in which it is difficult to determine whether consumer welfare increases from the policy. This note outlines a simple means to determine whether consumers benefit from a fat tax by comparing the ratio of expenditures on the taxed good to the weight effect of the tax against the individual’s willingness-to-pay to for a one-pound weight reduction. Our empirical calculations suggest that consumers would be have to be willing to pay $6,000 to $7,500 to reduce weight by one pound for a soda tax to be welfare enhancing. The results either suggest that a soda tax is very unlikely to increase consumer welfare or that the policy must be justified on some other grounds that abandon standard rationality assumptions