Fat Taxes and Thin Subsidies: Distributional Impacts and Welfare Effects

The extant literature on fat taxes and thin subsidies tends to focus on the overall effectiveness of such fiscal instruments in altering diets and improving health. However, little is known about the welfare impacts of fiscal food policies on society. This paper fills a gap in the literature by assessing the distributional impacts and welfare effects resulting from a tax-subsidy combination on different food groups. Using the methods derived from marginal tax reform theory, a formal welfare economics framework is developed allowing the calculation of the distributional characteristics of various food groups and approximate welfare measures of prices changes caused by a tax-subsidy combination. The distributional characteristics reveal that many of the food groups target by a fat tax are consumed in greater concentration by low-income households than higher-income households. The overall welfare effect of a fat tax and thin subsidy combination is found to be negative, meaning that the thin subsidy is not enough to compensate for the negative impacts of the fat tax.