Equity-Driven fiscal Policies: Taxing Ultra-Processed products and subsidizing minimally processed foods

Abstract

Promoting individual health and enhancing the global food system requires prioritizing healthy and sustainable food choices. The escalating consumption of ultra-processed products (UPP) in many countries significantly contribute to the obesity epidemic and associated diseases, alongside posing environmental challenges as these products are claimed to increase natural resource use, greenhouse gas emissions and agrobiodiversity loss. To address these problems, nations are adopting market-based strategies, such as adding or elevated taxes on specific UPPs, and promoting the consumption of minimally processed foods such as fruits and vegetables (FV). These initiatives are particularly relevant since the COVID-19 pandemic and recent conflicts have resulted in significant shifts in the relative prices of such foods. Using an Almost Ideal Demand System (AIDS), we assess the impact of four fiscal policy scenarios on household food purchases, nutritional quality, and financial dynamics. These scenarios involve UPP-only taxes, an FV subsidy, and a combination of both. Our findings highlight that a 20% UPP tax, coupled with a 20% FV subsidy, substantially enhance nutrition. Stratifying by income levels, we find similar relative costs for lower- and higher-income households. Although the combined UPP tax and FV subsidy reduces harmful nutrient consumption by 2.2 to 8.0%, it incurs a 0.32% consumer welfare loss for Brazilian households. Despite this, the FV subsidy remains the most equity-enhancing option for low-income Brazilians. These results provide valuable insights for crafting policies promoting health, equity, and sustainability in the face of evolving global challenges.