ARA

Taxation

ALCOHOL BEVERAGE TAXATION

There is an understandable temptation for medical or social researchers to seek elements of a solution to the problem of alcohol abuse in a tougher fiscal policy expressed in the form of high taxes on alcohol beverages.

Although control of price through taxation remains a priority for those who favour a “control of consumption” approach to alcohol policy, it has been increasingly criticized because of its insensitivity to the drinking patterns of different individuals and groups.

The vast majority of consumers of alcohol beverages do so in a responsible manner and therefore from a public health point of view, it would be desirable to use taxes to try and alter consumption patterns only if, through that, one were to address the problems of abuse. The imposition of tax forces moderate drinkers to pay for social costs that do not derive from their behaviour.

An alcohol tax does not accurately target those who abuse alcohol or those who occasionally misuse alcohol, such as people who sometimes drive when they are over the limit. Alcohol taxes, therefore, are an inappropriate way of addressing the social costs of alcohol abuse.

“Alcohol taxes, on a per drink basis, have the disadvantage of burdening both abusers and non-abusers. Other approaches to alcohol control can be focused more on abusers. For example, strong enforcement of drunk driving laws and severe sanctions for those convicted of drunk driving focus only on abusers” (Saffer and Chaloupka).
    
Alcohol abuse and alcoholism are related to the complex interaction of biological, socio-cultural and psychological factors in the environment, which will not respond to simplistic and cosmetic measures of prevention.

Per capita consumption

Followers of the so-called “control-of-consumption theory” (or, as it is also known – the single-distribution theory) contend that there is a link between per capita consumption and levels of abuse.

This theory however has been challenged in recent years as a result of conflicting empirical evidence and mounting evidence regarding the beneficial health effects of moderate alcohol consumption (Grant and Litvak).

There is now a growing body of opinion that it is more relevant to focus on patterns of drinking rather than per capita consumption as a means of addressing the problems of abuse.

“One of the major conceptual shifts that has occurred in the alcohol field over the past decade has been the recognition (albeit reluctantly in some quarters) of the limitations and inaccuracies inherent within a single-distribution theory of alcohol consumption and all that such a position implies.

While it played a valuable part in terms of heightening the profile of prevention issues and fueling debate about them, it nonetheless has done prevention a disservice through the long and protracted effort required to shift the focus of attention away from mean per capita consumption to address more meaningful questions on patterns of consumption, such as occasions of drinking, frequency of episodes of intoxication, drinking setting, and other associated factors” (Roche and Evans).

When the control-of-consumption theory came under closer scrutiny, serious doubts about its applicability to solving alcohol-related problems were raised.

The main criticism was that, far from proving a steady relationship between average per capita consumption and the prevalence of heavy drinking in a population, Ledermann (the architect of the theory) had based his model on the assumption that it exists.

His mathematics were found to be weak and speculative (Duffy) (Smith) and based on the presumption of a homogeneous population. Ledermann’s conclusions have been refuted by empirical data from Britain, America, Scandinavia, and elsewhere (Plant).

Impact of increased taxation

One of the consequences of an extraordinary increase in excise tax will be that moderate consumers will reduce their consumption with no concomitant health benefits, while those who abuse alcohol will spend even more of their household income on alcohol. “First, the light and moderate drinkers are responsive to price.

Thus, any alcohol taxes designed to discourage heavy or abusive drinking will impose welfare losses on drinkers who may not be imposing external costs by their drinking. Second the estimates indicate that heavy drinking is less price elastic than is moderate drinking. Thus, the price elasticity is lowest for the individuals who consume more than half of the alcohol”. (Manning, Blumberg and Moulton).

A further problem arising out of excessive taxation is that it leads to smuggling of cheaper alcohol across borders and the production of potentially dangerous home made concoctions.

Two European case studies – Denmark and Eire – show that indirect tax differences do act as a real incentive for consumers to cross-border shop (Crawford and Tanner).

The experience in Canada has been that “liquor smuggling is directly related to the respective prices of legal and contraband liquor"” A comprehensive study of contraband liquor in Canada concluded that any significant reduction in the consumption of contraband liquor “must logically come from a reduction in taxes” (“Contraband Liquor in Canada”).

In the first five months of 1995, following the imposition, in the UK, of an additional 4% duty on alcoholic beverages, the Treasury revenues from alcoholic beverages declined by 62,3 million pounds.

Bootlegged imports began to grow, a massive boom in cross-border shopping became evident and more than 10,000 full time jobs were lost as a result (Boyfield).

“HM Customs and Excise….estimate that….excise revenue losses from increased legitimate cross-border shopping amounted to 200 million pounds, of which 100 million was attributable to lost sales of beer, wine and spirits” (Crawford and Tanner).

The Danish Institute of Border Region Studies reported in 2004 that up to 29% of beer consumed in Denmark is purchased across the border in Germany. In Sweden 33% of normal strength beer (i.e. >3.5% abv) consumed in the country is purchased in Denmark, Germany or the Baltic States.

Conclusion

• The overwhelming majority (90% and more) of consumers of beverage alcohol do so responsibly. They cause no harm nor generate any costs for which society can demand compensation.
  
  
• Reducing the consumption of those who drink in moderation will not provide any health benefits.
  
  
• The Control-of-Consumption theory has been challenged. Where its tenets have formed the basis of alcohol policy the results predicted by the theory have not materialized. Hence, simply targeting a reduction in per capita consumption as a means of addressing the problems of abuse is not the answer.
  
  
• Extraordinary increases in taxation on beverage alcohol can lead to cross-border shopping, smuggling and consumption of potentially dangerous homemade concoctions.
  
  
• The industry is a major contributor to any economy and extraordinary tax hikes can result in diminishing returns to the state and the “killing of the golden goose”, without any concomitant benefits.

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