Income-expenditure elasticities of less-healthy consumption goods
| Date | 10 April 2017 |
| DOI | https://doi.org/10.1108/JEPP-03-2016-0008 |
| Published date | 10 April 2017 |
| Pages | 127-148 |
| Author | Adam Hoffer,Rejeana Gvillo,William Shughart,Michael Thomas |
| Subject Matter | Strategy,Entrepreneurship,Business climate/policy |
Income-expenditure elasticities of
less-healthy consumption goods
Adam Hoffer
Department of Economics, University of Wisconsin –La Crosse,
La Crosse, Wisconsin, USA
Rejeana Gvillo
Department of Economics, University of Memphis, Memphis, Tennessee, USA
William Shughart
Department of Economics and Finance, Utah State University,
Logan, Utah, USA, and
Michael Thomas
Department of Economics and Finance, Creighton University,
Omaha, Nebraska, USA
Abstract
Purpose –The purpose of this paper is to identify how consumption of 12 goods –alcohol, cigarettes, fast
food, items sold at vending machines, purchases of food away from home, cookies, cakes, chips, candy,
donuts, bacon, and carbonated soft drinks –varies across the income distribution by calculating their
income-expenditure elasticites.
Design/methodology/approach –Data on 22,681 households from 2009-2012 from the Bureau of Labor
Statistics’Consumer Expenditure Survey were used. The data were analyzed using ordinary least squares
regressions and Cragg’s double hurdle model which integrates a binary model to determine the decision to
consume and a truncated normal model to estimate the effects for conditional (yW0) consumption.
Findings –Income had the greatest effect on expenditures for alcohol (0.314), food away from home (0.295),
and fast food (0.284). A one percentage-point increase in income (approximately $428 at the mean) translated
into a 0.314 percentage-point increase in spending on alcoholic beverages (approximately $1 annually at the
mean). Income had the smallest influence on tobacco expenditures (0.007) and donut expenditures (−0.009).
Research limitations/implications –Percentage of a household’s discretionary budget spent on the
studied goods falls substantially as income gets larger. Policies targeting the consumption of such goods will
disproportionately impact lower income households.
Originality/value –This is the first manuscript to calculate income-expenditure elasticities for the goods
studied. The results allow for a direct analysis of targeted consumption policy on household budgets across
the income distribution.
Keywords Consumption goods, Income expenditure elasticity, Obesity policy, Selective tax policy, Sin tax
Paper type Research paper
1. Introduction
Growing American waistlines are stressing public health expenditures. By 2030, total health
care costs attributable to obesity could reach $956.9 billion, or as much as 18 percent of total
US health care costs (Wang et al., 2008).
While the consumption of alcohol and tobacco have received a great deal of attention in
the economics and health literatures, consumption of other unhealthy goods, such as soda,
candy, chips, and other snack foods, only recently have begun to draw the attention of
researchers. Consequently, we know little about the impact selective excise taxes may have
on consumers of these goods.
In this study, we explore the characteristics of households that consume 12 less healthy
goods –alcohol,cigarettes, fast food, itemssold at vending machines, purchasesof food away
Journal of Entrepreneurship and
Public Policy
Vol. 6 No. 1, 2017
pp. 127-148
© Emerald PublishingLimited
2045-2101
DOI 10.1108/JEPP-03-2016-0008
Received 8 March 2016
Revised 30 June 2016
8 July 2016
Accepted 10 July 2016
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/2045-2101.htm
JEL Classification —D12, Q18, I18
127
Income-
expenditure
elasticities
from home, cookies, cakes, chips, candy, donuts, bacon, and carbonated soft drinks.
Specifically,we focus the effects on consumption of income. We calculateincome-expenditure
elasticities to quantify the extent to which expenditures on such goods vary with income.
Income expenditure elasticities are important because they can be used to assess vertical
tax equity –how tax burden varies across the income distribution. If lower income
households consume relatively more unhealthy goods than higher income households and
those goods are taxed in order to disincentivize consumption, if expenditures respond less
than proportionately to changes in household income, lower income households will
continue to spend far larger percentages of their budgets on the selectively taxed items,
meaning that they will bear a heavier tax burden than high-income households.
For consumers who did not quit smoking after New York City raised its excise tax on
cigarettes, for example, expenditures on cigarettes from low-income households increased
from 11.6 to 23.6 percent of disposable incomes (Farrelly et al., 2012).
Consumption taxes on alcohol and tobacco are widely considered to be regressive
because the own-price elasticity of demand for such goods is less than one in absolute value:
a 10 percent increase in the prices of cigarettes and alcohol leads to about a 5 percent
reduction in consumers’purchases. Such taxes violate the principle of horizontal tax equity
because non-drinking and non-smoking households face smaller tax burdens than do less
abstemious households. A major contribution of this study is to ask whether vertical tax
equity would similarly be violated by taxing and/or regulating less healthy consumption
goods, which are studied far less in the literature.
The income-expenditure elasticity model utilized in this study offers many advantages
over the traditional income-quantity elasticit y (commonly abbreviated as “income
elasticity”) or own-price elasticity models, but also introduces other interpretative
restrictions. The most notable limitation of the income-expenditure model specification is
that by utilizing total expenditures as the dependent variable, the effects of price and
quantity are combined and thus inseparable. That is, the income-expenditure model cannot
disentangle the effects on price and quantity from a policy change, such as those following
the imposition of a tax.
However, the most attractive feature of the model estimated herein is that it supplies a
direct measure of changes in household spending and the factors that influence those
expenditures. Marginal expenditure responses can be inferred from price elasticity
estimates, but the income-expenditure elasticity model provides a more direct means of
quantifying the way in which household expenditures vary in response to changes in a
number of factors, such as income.
We also rely on total expenditures rather than quantities because the former absorbs
quality changes that may not be included by traditional income elasticity or price elasticity
estimates. For example, a sizable range of qualities and prices exist in any attempt to model
alcohol consumption. A box of wine may sell fora price roughly equal to the minimum hourly
wage, while a rarevintage can easily sell for thousands of dollars perbottle. A measure of the
quantity of wine consumed as income varies will be inaccurate if it does not account for
differences in product quality. Therefore, we consider the income-expenditure elasticities
calculated in this study to represent an additional contribution to the literature.
2. Methods and procedures
We rely on pooled micro data from the 2009-2012 Bureau of Labor Statistics’(BLS)
Consumer Expenditure (CE) surveys. We combine expenditure (EXPN) and family (FMLY)
files from the diary survey. The FMLY files contain information about each household’s
demographics[1]. The EXPN files record household expenditures for a consecutive
two-week period based on self-reported out-of-pocket spending. The CE survey codes the
expenditure data into more than 500 categories. We identified several goods that are targets
128
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