Daily Archives: 19/05/2016

Dereliction of duty: Are UK alcohol taxes too low?

pigouvian taxationThis is a new report from the Institute of Alcohol Studies, that claims that the Government’s own estimates of the social costs of alcohol imply that alcohol duty should be raised. The report summarises the economic theory underpinning alcohol taxation (including the theory of pigouvian taxation which I’m not even going to try to explain or pretend I understand!) and considers it a dereliction of duty.

Here’s the summary to their report:

There are three standard reasons why governments tax alcohol:

1. Externality Correction: to ensure that alcohol prices reflect the cost to third parties who are harmed by drinking
2. Paternalism: to reduce people’s consumption for their own good
3. Revenue Raising: to fund the government.
The UK Government estimates that externalities associated with alcohol cost England and
Wales £21 billion every year.
Alcohol duty in England and Wales currently generates only £9 billion, less than half of the
value of these externalities.
This suggests higher alcohol taxes can be justified on the basis of the harm drinking
causes to wider society alone, without considering the impact on the drinker themselves.
The lost enjoyment suffered by moderate consumers as a result of alcohol duty is
relatively small – we estimate £1.2 billion (less than 2% of market value) to be the absolute
possible ceiling of the impact. This is dwarfed by the benefits of duty, in terms of reducing
crime, healthcare savings and improving economic output, which total a value of at least
£4.4 billion.
Under certain assumptions, tax revenue should not just equal, but exceed the cost of
•If externalities are disproportionately higher at higher  levels of consumption i.e. if moving from the fourth to the fifth drink is substantially worse than moving from the first to the second
•If we think that avoiding harm to third parties should be given greater weight than the enjoyment of drinkers.  There is a strong case for paternalistic taxes on alcohol, as it is highly plausible that many people drink excessively, and this over consumption can be deterred by alcohol taxes – this adds a further reason for raising duty.  Economists are divided as to whether alcohol taxes cause less distortion to the economy than other taxes and are therefore a particularly desirable way of raising government revenue.
The interaction of alcohol taxes with other policies is complicated – stricter licensing and drink driving regulations, all else equal, mean that taxes should be lower.
On balance, these arguments suggest to us that alcohol taxes in the UK are too low.
We believe the Government should be committed to higher alcohol taxes as a result
of its claim that alcohol externalities cost England and Wales £21 billion each year.
And this was the response from Alcohol Policy UK following the recent UK March Budget
A Government release on the duty impacts though says the freeze ‘is likely to lead to a minor increase in overall alcohol consumption in the UK’, as alcohol is of course price sensitive. Indeed on the headline hitting sugar tax announcement, Osborne stated “We understand that tax affects behaviour. So let’s tax the things we want to reduce, not the things we want to encourage.” Twitter of course raised questions, including whether sugary alcoholic drinks would be affected, or whether parallels could be drawn with the 2012 headline grabbing announcement of minimum pricing – subsequently dropped – which was also timed around a budget with less than impressive economic news.
Edited to add 6th June 2016:
Minimum pricing for alcohol targets harm better than tax rises

Whether alcohol tax rises would be an acceptable and effective alternative could determine the legality under EU law of Scotland’s law permitting a minimum unit price for alcohol. This analysis predicts tax rises would curb consumption and save lives, but not without perhaps unacceptably hitting the pockets of non-harmful drinkers | Drug and Alcohol Findings, UK

Bearing in mind there has been a rash of stories in the last few days about rising poisonings amongst teenagers and alcohol is behind this increase one has to question pricing as a factor as the first piece from The Independent does ….

Surge in girls’ alcohol poisoning behind rise in teenage poisonings

The authors said: “One potential explanation for the increase in alcohol poisonings over time is increased availability, with the relative affordability of alcohol in the UK increasing steadily between 1980 and 2012, licensing hours having increased since 2003, and numbers of outlets increasing alongside alcohol harm.”

Sharp rise in UK teen poisonings over past 20 years, particularly among girls

The number of teenage poisonings over the past 20 years in the UK has risen sharply, particularly among girls, according to a new study by researchers at The University of Nottingham | University of Nottingham, UK

Rise in ‘intentional’ alcohol poisoning among teens – BBC iPlayer radio

There has been a sharp rise in the overall number of teen poisonings over the past 20 years in the UK, particularly among girls and young women, according to a new report | BBC, UK

Edited to add: 15th July 2016

Small rise in booze duty might cut violence-fuelled emergency department visits by 6000/year, UK

Tax system reforms in England and Wales might be better than minimum unit pricing | MNT, UK