The Pitfalls of Social Engineering Through the Tax Code

A new research study finds attempts to change personal behavior through the tax system not only can fail, they can backfire.


As an organization that tracks tax bill introductions every legislative session, we can say with complete confidence: there is an irresistible urge to use the tax code to incentivize certain behaviors to achieve a desirable societal outcome. The notion that tax policy can affect the decision-making of organizations and individuals, and change society for the better in the process, is very appealing and powerful.

A very useful lesson in the problems and pitfalls of this mindset comes from a new research study recently reported in State Tax Notes. A team of investigators from Cornell University sought to explore whether taxing high calorie foods like soft drinks could reduce obesity. The study included 113 households over 6 months in an American city of 62,000. Half the households faced a 10% tax on calorie-dense foods and beverages; the other half didn’t.

The results are a fascinating lesson in the problems and challenges of social engineering through the tax code. For starters, the behavior changes themselves often had a shorter shelf life than the products being taxed. For example, the tax did result in a one-month decrease in soft drink purchases. But by the third month, the impact had vanished.

Then there are the unintended consequences. In beer-purchasing households, the tax actually led to increased purchases of beer. As the researchers note, “To behavior scholars, this underscores the importance of investigating substitutions.” Or as your college roommate might say, “there’s more than one way to get a buzz.”

It gets even more interesting. The study also included a 15% discount on relatively healthy foods. Unexpected behaviors and unintended consequences again littered the findings. Although study subjects recognized how these tax and pricing schemes were supposed to influence their behavior, pre-conceived notions got in the way of results. For example, because participants believed that fruit juice was a healthy option, they bought more of it even though it was subject to the 10% tax for its high sugar and caloric content. Or in the wonky words of the researchers, “they took the gist of the tax and applied it to their own metrics.”

And then there’s this amazing finding. The tax on calorie-dense foods contributed almost nothing to changing nutritional habits except for one subgroup – the very poorest households. Some might be tempted to justify the whole effort on this demographic result alone. One problem: the tax actually prompted more purchases of unhealthy food. Why? People believed higher prices meant the products might be becoming more unavailable and inaccessible to them. According to researchers, the poorest households did in fact reduce their caloric consumption, but reduced purchases of healthy foods to buy more unhealthy foods – which, of course, defeats the whole purpose of the tax in the first place.

Tax prices do matter, and they play a role in affecting decisions. But this study should demonstrate the foolishness of assuming that tax changes trigger simple Pavlovian responses in us – human beings are far too complicated for that. What policymakers should take away from this study is a sense of humility about their ability to incent behaviors using the tax code, and therefore the appropriateness of efforts to do so.

Above all, it demonstrates the importance of focusing on the primary purpose of the tax system in developing tax policy: to obtain the revenues necessary to support government operations.