3.4  Tax

This section assesses the case for a specific tax on alcohol by considering the factors discussed in section 2.

In the case of alcohol each consumer has a different consumption pattern and therefore generates a different level of externality. In most cases it would be prohibitively costly to distinguish a priori consumers who are likely to generate large externalities, as this would require information on the intended consumption pattern and level of consumption of the consumer.[18] Given this the government will be constrained to applying a uniform tax over a range of consumers and units.

The lack of homogeneity in consumption patterns does not necessarily make a uniform tax undesirable. As discussed, a uniform tax seeks to balance the gains from the reduction in the externality against the loss in consumption benefits that are not gained in tax revenue. Further, there is a clear causal relationship between the consumption of alcohol and damage. For a given level and pattern of consumption the expected negative effect of alcohol is relatively homogenous across consumers. As the negative externality is related to the good, rather than only to particular characteristics of the individual, the quantity of alcohol (ethanol) consumed is an appropriate base on which to levy the tax. This is not the case with the external benefits of alcohol. As only those at immediate risk of ischeamia receive the positive health benefits associated with alcohol, individual consumer characteristics are a major driver of the different incidence of the benefits. This, combined with the fact that there are more direct ways to reduce the risk of ischeamia, suggests alcohol taxation (or subsidisation) policy is not the appropriate tool to use to reduce risks associated with ischeamia.

In order to implement a uniform Pigouvian tax accurately one needs information on the optimal tax of each individual and the price-responsiveness of each individual. This information is not available. However, as discussed one can still infer the appropriate level of the tax if there is information available on the total level of the externality, the incidence of damage from alcohol consumption and on population consumption patterns.

There is information that can be used to estimate the tangible costs associated with the externalities of alcohol. These costs are large. Quantifying intangible costs, such as the cost of third party loss of life, is more problematic. Monetary proxies for the value of non-monetary costs are often used. However, quantification in these cases is difficult and controversial. For this reason the estimate used in this paper of the total externality focuses mainly on tangible costs. Given uncertainties as to the magnitude of the externality this paper uses an estimate of the minimum plausible bound of the externality as the base on which to assess the level of the tax against. There is sufficient information on the incidence of damage from alcohol and population consumption patterns on which to make judgments as to the appropriate level of the tax. These factors are discussed more fully in the next section.

The next section discusses the appropriate rate for a uniform tax in the case of alcohol.