US alcohol taxes: too low,
too high or just about right?
James Fogarty (U. West. Aust.) &
Giri Parameswaran (Haverford College)
Current alcohol taxes
Current alcohol taxes
Current alcohol taxes
Unthinking decision rule?
Unthinking decision rule?
Overview of the model
Overview of the model
Scale is the individual person level
Price ($)
Price + Externality
Price
Quantity of alcohol consumed
(per person/period)
Overview of the model
Scale is the individual person level
Price ($)
Price + Externality
Price
D moderate
D uninformed heavy
D informed heavy
Quantity of alcohol consumed
(per person/period)
Overview of the model
Scale is the individual person level
Price ($)
Price + Externality
Marginal Externality
Cost
Price
D moderate
D uninformed heavy
D informed heavy
qm1
qh1
qu1 Quantity of alcohol consumed
(per person/period)
Overview of the model
Scale is the individual person level
Price ($)
Price + Externality
Price
True marginal benefit less
than marginal cost
D moderate
D uninformed heavy
D informed heavy
qm1
qh1
qu1 Quantity of alcohol consumed
(per person/period)
Overview of the model
Total welfare loss from the tax
Price ($)
Price + Externality
Price + Tax
Price
D moderate
D uninformed heavy
D informed heavy
qm2 qm1
Total moderate loss =
Total abuser loss =
qh2 qh1
qu2 qu1 Quantity of alcohol consumed
(per person/period)
× No. moderate consumers
× No. informed heavy consumers
Overview of the model
Total externality cost reduction from the tax
Price ($)
Price + Externality
Price + Tax
Price
D moderate
D uninformed heavy
D informed heavy
2
qm qm
1
Externality cost reduction =
Externality cost reduction =
qh2 qh1
qu2
qu1 Quantity of alcohol consumed
(per person/period)
× No. informed heavy consumers
× No. uninformed heavy consumers
Overview of the model
Welfare gain to uniformed heavy consumers
Price ($)
Price + Externality
Price + Tax
Price
D moderate
D uninformed heavy
D informed heavy
qm2 qm1
Private welfare gain =
qh2 qh1
qu2 qu1 Quantity of alcohol consumed
(per person/period)
× No. uninformed heavy consumers
Driver of results I
Driver of results I
• Extent of externality costs
Price ($)
Price + Externality1
Price
D moderate
qm1
D uninformed heavy
D informed heavy
qh1
qu1 Quantity of alcohol consumed
(per person/period)
Driver of results I
• Extent of externality costs
Price ($)
Price + Externality2
Price + Externality1
Price
D moderate
qm1
D uninformed heavy
D informed heavy
qh1
qu1 Quantity of alcohol consumed
(per person/period)
Driver of results II
Driver of results II
• Proportion of consumers in each category
Price ($)
Price + Externality
Price + Tax
Price
D moderate
D uninformed heavy
D informed heavy
qm2 qm1
qh2 qh1
qu2 qu1 Quantity of alcohol consumed
(per person/period)
Driver of results II
• Proportion of consumers in each category
Price ($)
Price + Externality
Price + Tax
Price
D moderate
D uninformed heavy
D informed heavy
qm2 qm1
qh2 qh1
qu2 qu1 Quantity of alcohol consumed
(per person/period)
Driver of results II
• Proportion of consumers in each category
Price ($)
Price + Externality
Price + Tax
Price
D moderate
D uninformed heavy
D informed heavy
qm2 qm1
qh2 qh1
qu2 qu1 Quantity of alcohol consumed
(per person/period)
Driver of results III
Driver of results III
• Consumer responsiveness
Price ($)
Price + Externality
Price + Tax
Price
D moderate
D informed heavy
qm2 qm1
qh2 qh1
Quantity of alcohol consumed
(per person/period)
Drivers of results III
Price ($)
Price + Externality
Price + Tax
Price
D moderate
D informed heavy
qm2 qm1
qh2 qh1
Quantity of alcohol consumed
(per person/period)
Model components
Model components
• Consumption of beer, wine, spirits
• By consumer type (mod., heavy., uniform.)
• Price of beer, wine, spirits
• Own and cross-price elasticity beer, wine, spirits
• By consumer type (mod., heavy., uniform.)
• Externality cost for beer, wine, spirits
• Uniformed excess consumption cost
Main results beer
Current tax rate
Optimal tax rate
Main results wine
Current tax rate
Optimal tax rate
Main results spirits
Current tax rate
Optimal tax rate
Summary
• Results are sensitive to:
- Externality cost assumptions for beverages
- Relative demand responsiveness
- Heavy consumption share
• Results are insensitive to:
- Overall price elasticity
- Inclusion of uninformed consumers
- Price assumption
Key messages
• Beer taxes about right
• Wine taxes too high
• Spirits taxes too high
• Further work optimal for a given revenue
requirement