Traffic lights + taxes on food = A possible nudge

Reader Tom Allchurch from the U.K. writes the Nudge blog with an idea to revamp the value added tax (VAT) system’s rules and presentation.

VAT rules on food are truly bizarre and incomprehensible. Almost no one understands them. I recently met Ed Balls the Minister for Children who admitted that he didn’t. The original logic back in the 1970’s for no VAT vs. 17.5 percent VAT was “luxuries” vs “essentials.” So VAT is payable on hot food (eat-in or take away), food eaten on the premises, all beverages (water, soft drinks, juices, coffee), confectionery and processed savoury snacks. It is not payable on food that you heat up yourself, cold food taken away or taken home, coffee granules, beans, tea bags, bakery, and cakes, nuts in their shells. Read the full rules here.

As a result some foods high in sugar and fat have a high tax (Coke, potato crisps), while some which are low in fat also have a high tax (Diet Coke, mineral water, baked potato crisps). Some very unhealthy foods have no tax (Krispy Kreme donuts and milk shakes). Fries you cook yourself. Chocolate Cake. Sugar. Frying oil. Some very healthy foods have a high tax like fruit eaten on the premises, and salads eaten on the premises.

Allchurch’s idea is to revamp the VAT on food by taxing unhealthy foods at a higher rate and labeling them with a red circle (like a traffic light). Healthy foods would not be taxed (or taxed at a low VAT) and be labeled with a green circle.

The traffic light labelling system already exists from our National Food Standards Agency covering fat, saturated fat, sugars and salt. But it is not mandatory. If it were then it would be simple to set the tax rate in steps. The total tax revenue might stay same, but would be focused on unhealthy foods. The combination of clear front of pack labelling and price differences would be a powerful influence on consumer behaviour. It would also be a powerful influence on food manufacturers and retailers who would see big changes in profitability from different foods encouraging further investment and focus. Imagine if the price of Diet Coke were 20 percent lower than Coke. Imagine if low fat chips were 20 percent cheaper than high fat ones.

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