THE BLOG
06/30/2016 06:20 pm ET | Updated Jun 30, 2016

Freedom, Fairness, And The Nanny State: "Nudging" Through Pigovian Taxes

On June 20, 2016, Philadelphia mayor Jim Kenney signed Bill 160176, which is the sugar sweetened beverage tax, into law. This bill, referred to as the "soda tax" will place a surcharge of 1.5 cents per ounce on every sweetened beverage sold in the city.

On the other side of the planet, the Australian government has started enforcing an $11K tax penalty on parents who don't vaccinate their children.

While these may seem like very different kinds of policies, economists call both "Pigovian taxes," and despite public opinion, leading thinkers have argued that they make a lot of sense. The thinking behind a Pigovian tax is that some behaviors create costs for everyone, not just the people who undertake them. If a company pollutes a river, there are costs to nearby cities. If a non-immunized child carries a disease, other students at their childcare center may fall ill. If an individual is unhealthy, insurance rates rise and national healthcare costs go up.

By imposing a tax, the thinking goes, those costs are assigned back to the person creating them. A company may pay a fine to the city to pay for pollution clean-up. For an individual, the soda surcharge or immunization penalty can be used to support the quality of life for society as a whole. As such, Pigovian taxes should be a win for liberals, comfortable with government "nudging" people toward a better life, and for conservatives, who champion the importance of personal responsibility.

So why do people get so upset about these taxes?

In a recent paper co-authored with Paula Fitzgerald and Mike Walsh of West Virginia University, we learned that peoples' attitude toward these taxes depends on a fundamental belief about the way the world works.

Specifically, acceptance or rejection of Pigovian taxes is driven by the belief that people affect one another. People simply vary in the extent to which they believe that their behaviors create costs for others. This kind of effect -when one's behavior creates costs for others - is referred to as a "perceived externality." Basically, we all recognize that our behavior affects ourselves; that's an "internality." But when we believe that our behavior creates costs for others, we believe in "externalities." Some people believe in them, some people don't.

If you believe that other peoples' behavior creates costs for you, it seems to you that Pigovian taxes nudge us toward fairness, assigning these costs back to the people who create them. But if you don't, these taxes are an example of "nanny state" intrusiveness that may make your blood boil. After all, if I don't believe that my soda consumption creates costs for everyone, why should I feel that it's OK to be punished for choosing soda? My own health is my own problem, and I'm the only one who might suffer for my choices. If my child isn't immunized and becomes ill, then that will be my problem. Our data indicates that people who think this way may be Democrat or Republican, old or young, male or female - and policymakers who try to beat them over the head with a Pigovian tax - will fail because they're not addressing a root issue that underlies its rejection.

If a Pigovian tax is desirable for some reason, whether to nudge healthier behavior or to raise needed revenue, is there a way to make it more acceptable?

One solution is to try to convince people that negative externalities exist. We've tried this, and in our studies found that it's pretty hard to shift peoples' perceptions of externalities. You can tell people all day that obesity creates costs for society, but if they don't believe in negative externalities, they can - and will - dismiss this information quite easily.

A more promising option we found in our research has to do with simple framing of the tax. Generally, people see taxes as a punishment, and in this case, they're nearly explicitly so. No one likes taxes, and no one likes being scolded, but we do like being rewarded. In one experiment, we reframed price differences as rewards for good behavior rather than punishments for damaging behavior. That is, if you choose to buy a less-sugary as opposed to a more-sugary drink, you get a discount. While mathematically, this could work out to exactly the same price levels, allowing people to feel that they could be rewarded for good behavior seemed much more fair, and thus, more acceptable, to our respondents - regardless of their belief in externalities.

And maybe this is where policymakers need to reconsider their approach. What if we considered using carrots? While not useful in all cases, it may be worth considering if sustained behavior change comes not from slapping the hand of someone who reaches for their Big Gulp of caffeinated sugar-water, but in giving a small cheer to someone who selects plain-old, calorie-free hydrating water? We all have days when we might want the sugar water, and on those days, we're likely perfectly happy to pay a few more cents for a treat - we're less price-sensitive when it comes to indulgences. And seeing the sugar water as an indulgence may be another categorization win that lowers our consumption over time - it's something for special occasions, not every day. Given that 17% of Americans currently imbibe sugary drinks on a daily basis, this mindset could change consumption patterns substantially.

Framing a lower price as a reward for good behavior also feels less like a restriction of freedom. As Sheena Iyengar wrote in a related column six years ago, people react very negatively when they feel that government is trying to take away their ability to make their own decisions. But giving people a bonus - a lower price - for making a free choice - feels less like a deprivation of choice than holding a penalty over their head for choosing "incorrectly."

One might argue that our efforts would be better spent in trying to help people see their interconnectedness, that is, in raising perceptions of externalities to a level that naturally prompts willingness to share responsibility. Ideally, I'd agree, but this may be part of a bigger revolution than will happen in the short-term. In the meantime, on days when we might be generally indifferent, the reward associated with a less-unhealthy option may be enough to nudge us toward a new habit, while helping to fund a healthier society at the same time.

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