Published in Menzies House blog on 18 February 2010 under the title “Fat Tax & the Liberal Tradition“
Yesterday, Stephan Knoll wrote about his campaign for government action to stop people getting fat, and argued that his proposals were consistent with “centre-right” philosophy. He’s half right.
Knoll explained that Australian children are getting fatter, that this will impact on the health budget and that therefore the government should intervene. He correctly pointed out that with our semi-socialist health system people aren’t facing the consequences of their actions and so the current approach is deficient.
But he is wrong when he says that “all potential solutions to the problem however are interventionist and a distortion of free market principles”. Indeed, one of his policy suggests is fully compatible with the free-market or libertarian philosophy.
To find the best solution it is necessary to properly understand the problem. The problem (as Knoll correctly identifies) is that individual choices aren’t being linked to individual responsibility, because of government health policy. When people aren’t responsible for the consequences of their own action, then they generally make poor decisions.
If the problem is caused by bad government health policy, then the most obvious solution is to fix government health policy. A libertarian position would be that health providers should be allowed to charge a premium for people depending on their risk profile, which would once again link individual choices with individual responsibility. This is exactly what Knoll calls for when he suggests a “scale on the health premiums and/or Medicare”.
Ironically then, while Knoll dismisses libertarian thinking as “misguided”, he was actually promoting a libertarian policy.
However, it is important to draw a clear distinction between the libertarian solution (allowing risk-pricing in health) and the leftist solution (introducing a new tax). While the libertarian solution removes the original policy mistake and encourages efficient risk pricing, the leftist solution seeks to keep the current policy mistake but add another offsetting policy in the (misguided) hope that politicians and bureaucrats will some day become competent risk managers.
Knoll insists that cigarette and alcohol taxes are a good template, but provides no evidence that they have worked well. Indeed, “sin” taxes are notoriously popular with governments because the demand for “sin” is relatively inelastic… meaning that those taxes don’t do much to change behaviour but are successful in raising lots of money for the government. Consequently, the government tends to set the tax too high, to the point where drinkers and smokers are paying significantly more than they cost the health system. Unfortunately, “sin” taxes are generally regressive, hitting poor people the hardest. It is also not clear that the government is spending money so well that they deserve any more.
So Knoll is half right. If he decides to pursue the policy of allowing risk-pricing in health then this should improve decision-making regarding fatty foods, and he should receive the support of the libertarians & conservatives. However, if he pursues the option of ever-higher tax and more faith in government, then it is not surprising that he will continue to be opposed by libertarians & conservatives.
As a side-issue, I note that obesity is not a prime driver of the growing health costs. Knoll is right to note the growing fiscal crisis caused by government health (and pension) spending, but he is wrong if he thinks those growing pressures can be solved by simply increasing tax. Health & pension spending needs structural reform to make them sustainable, but that is a topic for a different day.
John Humphreys 