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The theory of alcohol taxation

In light of this evidence, it is often argued that governments should intervene in the market for alcohol to raise its price. One of the most common ways of doing so is by levying specific taxes, known as excise duties, on the sale of alcohol. The World Health Organization classes increasing alcohol taxes as one of the most cost-effective measures for achieving its target of a 10% reduction in harmful alcohol consumption.[1] Alcohol tax has also been endorsed by the Organisation for Economic Co-operation and Development (OECD), among a suite of measures to reduce the negative health effects of drinking.[2] A recent Public Health England review of the efficacy of different alcohol policies concluded that increasing taxes was a cost-effective way to reduce alcohol consumption and harms.[3]

In general, taxes may be levied on alcohol for three reasons:[4]

  1. To correct for externalities: The consumption of alcohol imposes costs on third parties (‘externalities’) that are not reflected in the price charged by the retailer to the drinker - for example, increasing the risk of violence and social disorder, drink driving accidents, costs to the health service etc. One function of alcohol taxes is to ‘internalise’ these costs by ensuring that the drinker faces them.
  2. Paternalism: While externality-correction adjusts drinkers’ behaviour to prevent them imposing costs on others, paternalist justifications for tax say we should reduce people’s drinking for their own good. There are a number of reasons why the government may choose to act in such a way. Drinkers may not be fully informed about the risks of drinking. They may behave irrationally, because they are addicted or intoxicated, or indeed influenced by social pressure or marketing. This is understandably a controversial line of argument, but it is one accepted by many people and governments.
  3. To raise revenue for the Government: A third justification for taxes on alcohol is to raise revenue for the government. In particular, it is sometimes argued that alcohol taxes cause less distortion to markets than other goods, but the practical relevance of such arguments is debateable.

 

In practice, all three types of argument are influential, and in some cases reinforce one another in making the case for taxing alcohol.

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[1] World Health Organization (2013), ‘Global Action Plan for the Prevention and Control of Noncommunicable Diseases 2013–2020’, Geneva: World Health Organization, p. 67

[2] Organisation for Economic Co-operation and Development (OECD) (2015), ‘Policy Brief: Tackling harmful alcohol use’ <https://www.oecd.org/els/health-systems/Policy-Brief-Tackling-harmful-alcohol-use.pdf>

[3] Public Health England (2016), ‘The Public Health Burden of Alcohol and the Effectiveness and Cost-Effectiveness of Alcohol Control Policies: An evidence review’, p. 100

[4] Bhattacharya A (2016)., ‘Dereliction of duty: Are UK alcohol taxes too low?’ <http://www.ias.org.uk/uploads/pdf/Derelictionofduty.pdf>