Should different alcoholic beverages have different tax rates?

Michael Cameron’s blog ‘Sex, Drugs and Economics’ discussed a paper entitled “Equal Tax for Equal Alcohol? Beverage Types and Antisocial and Unlawful Behaviours” by Preety Srivastava, Ou Yang, Xueyan Zhao. The authors look at the negative externalities of consuming various alcoholic beverages in Australia, and the implications for different tax rates. The negative externalities of alcohol consumption they note are:

• impact on health and the addictive nature of alcohol

• cost of policing alcohol related crimes

• drunk driving accidents

• anti social behaviour

Alcohol taxes should focus on excessive consumers whose drinking results in significant negative external costs, rather than moderate consumers who do not impose such costs on others. However, it is very difficult for the government to determine those that are excessive consumers and therefore charging them different tax rates. As a consequence general alcohol tax applied uniformly across all drink types will reduce consumption among all consumers, leading to efficiency gains for those with excessive consumption and efficiency losses for those with low consumption who have have already accounted for the negative externalities in the private costs.

Since targeting taxes based on consumer behaviour is less practical, a more feasible and efficient approach would be to tax products more closely associated with the amount of negative externalities generated. The authors look at the relationship between consumption of different beverage types and various antisocial behaviours and use the National Drug Household Survey (NDSHS) from 2004 to 2019 and they focus on 8 antisocial and unlawful behaviours under the influence of alcohol:

• driving a motor vehicle;

• operating a boat;

• operating hazardous machinery;

• creating a public disturbance or nuisance;

• causing damage to property;

• stealing money, goods or property;

• verbally abusing someone;

• physically abusing someone.

The level of negative externalities depends on the type of drink The key insight from this analysis is that different beverage types should be taxed at varying rates, with higher taxes imposed on those associated with the greatest negative externality – see graphs.

This approach would likely involve placing the highest taxes on products such as regular-strength beer, pre-mixed spirits in cans, and potentially cask wine – see graphic below. The study suggests that Australia’s haphazard system of taxing alcohol might have got some things right. Beer, which is typically taxed more highly than wine, seems to do more damage. But it has got some things wrong. Cask wine appears to be significantly undertaxed relative to the damage it does.

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