Alcohol and Tax – Should the excise rates be increased?

La Palma drinks

– written by Aine de Niet

Alcohol and tax is a topic that is quite relevant to me seen as I like to have a drink (or even better; a lot of drinks) once in a while. However, over the past few years there has been an ongoing debate about the amount of tax that should apply for alcohol, which is seen as a demerit good. The tax that is charged over alcohol is called an excise tax. Excise taxes are indirect taxes that are charged on the sale of a particular good, in our case on the sale of alcoholic drinks. The goal of such an excise rate is to decrease the consumption of alcohol since it supposedly has a negative effect on our society. The excise rates cause consumers and producers to fully pay for the social costs of the good. This should lead to a more preferred outcome since the amount of negative externaligraphties is decreased. In the graph on the right we can see that without an excise there will be over-consumption; a quantity of Q1 at price P1. By introducing an excise, consumption will drop from Q1 to Q2 due to the price increase from P1 to P2. But is increasing the excise rates really a good plan or not? To get a better view on this we must first take a look at the advantages and disadvantages of excise taxes.

Advantages of excise rates            

The following arguments show why excises are a good thing and can bring advantages to our society:

  1. Excises raise money for the government. According to the CBS (Centraal Bureau voor de Statistiek), the money collected through excises accounts for about 8% of the total amount of taxes collected by the government. This money can be spent on things such as infrastructure, social security or education. However if the amount of consumption decreases so heavily it will have a negative effect on the state’s tax revenue.
  2. An increase in the price of alcoholic drinks will decrease consumption. This will also decrease the amount of negative externalities derived from the consumption of alcohol. First of all, people’s health can increase from drinking less alcohol. This especially holds for heavy drinkers. Secondly, due to the decrease in consumption there will be less addicts. Having less addicts is beneficial for society and also decreases the amount of costs and attention needed from the state. Lastly, a decrease in the consumption of alcohol will also lead to less disturbance to society. For example, less disturbance will also result in the police having to spend less attention to drunk people at party’s (e.g. drunk driving or fighting).

Disadvantages of excise rates

There are also some disadvantages that can be seen from imposing an excise. The following disadvantages are the most important:

  1. The price of alcohol for consumers will increase. This mean that if they want to enjoy some nice wine they will have to pay a higher price than they used to do. From the consumer’s point of view this is a bad thing.
  2. The decrease in the consumption of alcohol due to a price increase (which is achieved through increasing the excise) is very low. For example, the price elasticity for beer is -0.35 and -0.68 for wine. This means that if you would double the amount of excise this will only lead to a 4% decrease in beer consumption and a 7% decrease in wine consumption. Alcohol therefore does not seem to be very price elastic. These decreased percentages probably consist mostly of infrequent drinkers that find the new price of alcohol too high and not worth it. The addicts will still purchase alcohol. The increased alcohol price just means that they will spend a larger percentage of their income on alcohol than before, so they have less money to spend on things such as food and clothing.
  3. Increasing the excise will have a negative effect on multiple industries and levels of the supply chain. Especially the tourist, catering and hotel industry will experience a decline in the amount of customers. Examples of people affected are the owners and employees of restaurants and cafés, but also for wine producers. This means that increasing the excise in the Netherlands does not only have an impact on the Dutch economy but also on other countries’ economies. Think about large wine producing countries such as Italy, Chile and South-Africa that will notice a decrease in their exports.
  4. It also raises questions on whether it really is fair to increase prices of alcohol for the average consumer, which does not have any drinking problems.
  5. Lastly, excises could cause an increase in the illegal distribution of alcohol, or increase the amount of people that buy their alcohol in another country where it is cheaper. This leads to less control on alcohol consumption which is a counterfactual consequence. It could then become slightly similar to the drugs market where the government also fails to control the production and usage.

LowerCigTaxes4308-767944

The above cartoon pretty much sums up what excise tax is all about. On the one hand it is a good thing seen as it decreases the consumption of a demerit good. But on the other hand, the decrease in consumption can also mean a decrease in revenue for the state if the decreased consumption effect is bigger than the increased excise effect.

If you ask me, the above mentioned arguments have shown that increasing the excise rate even further is not optimal. The most important reason is that the decrease in consumption will not be very high. Besides, I find it quite unfair that the people without a drinking problem would literally have to pay the price of an excise increase. Drinking is not necessarily a bad thing and I find it important that people can still enjoy a drink now and then without having to pay an excessively high amount of money. Therefore, a better solution would be to tackle alcohol addictions in a different way, for example by informing people (and especially children) about the possible risks and consequences of alcohol.

Alcohol 3

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