National Drug Strategy
National Drug Strategy

The avoidable costs of alcohol abuse in Australia and the potential benefits of effective policies to reduce the social costs of alcohol

5.1 Alcohol taxation

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Strong evidence exists, both in Australia and internationally, that higher alcohol taxation, by raising alcohol prices, can be very effective in reducing alcohol consumption. There has been no recent research on the responsiveness of Australian alcohol demand to price changes (which economists call the price elasticity of demand) since Clements and Selvanathan (1991) and Clements et al. (1997). There has, however, been a wealth of international research on elasticities in other countries. For comprehensive surveys of the relevant literature see Anderson and Baumberg (2006) and Loxley et al. (2004). The many studies of alcohol demand elasticities indicate variation from country to country and often over time, but universally indicate that higher prices will lead to lower demand.

Anderson and Baumberg (2006, p. 264) summarise the results of the international research
as follows:
An increase in the price of alcohol reduces alcohol consumption, hazardous and harmful alcohol consumption, alcohol dependence, the harm done by alcohol, and the harm done by alcohol to others than the drinker. The exact size of the effect will vary from country to country and from beverage to beverage. There is strong evidence for the effectiveness of alcohol taxes in targeting young people and the harms done by alcohol.

Table 7 below presents Anderson and Baumberg’s summary of the strength of the research evidence on alcohol taxation.

Table 7. Effectiveness ratings for alcohol pricing and taxation

EffectivenessBreadth of research support Cost efficiency
Taxes
+++
+++
+++

Source: Anderson and Baumberg (2006, Table 7.7).
For the definitions of the ratings see Table 6 above.


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In summary, there is strong research evidence that the Australian Government has, in its tax instruments, a very potent tool to influence alcohol prices, and therefore alcohol demand.

There are four types of tax instruments which are currently applied to alcohol in Australia: GST is imposed across-the-board on nearly all goods and services at a flat rate of 10 per cent. As a result of the federal–state inter-governmental agreement under which the GST was implemented in 2000, it is not, in practice, available as an instrument to change alcohol (or indeed any other) prices (see Collins & Warren, 2007).

Customs duties, by their nature, apply only to imported alcohol and so represent a narrowly based and poorly targeted instrument. The case for their use in any sophisticated regime of alcohol taxation is weak. Far better taxation alternatives exist.

Excise duties are levied per litre of alcohol content, with the rates varying according to the
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The above details are provided in order to illustrate the fact that alcohol excise taxes are capable of being designed explicitly to target the types of alcohol known to be the subject of abuse (for example, high strength beer and alcopops) and to discriminate in favour of types of which abuse is known to be relatively low (for example, low strength beer).

The WET is levied at a rate of 29 per cent of wholesale price (that is, according to value rather than to alcohol content). A rebate is payable on the first $500,000 in WET paid annually by one producer or producer group.

These latter two tax instruments provide scope for sophisticated targeting of tax increases on hazardous and harmful alcohol consumption. There is little doubt that a combination of carefully designed excise taxes and the WET could be used effectively to target hazardous and harmful alcohol consumption, without entailing a significant sacrifice of the protective benefits of moderate consumption. That the WET is an ad valorem tax (that is, based on value) rather than a specific tax (based on some physical characteristic such as alcohol content) means that this tax is less easily targeted on abusive consumption. However, there appears to be no reason why wine could not also be subject to an excise tax component, with the possibility of some simultaneous reduction in the WET rate.

In an ideal situation of competitive neutrality, the case for uniform rates of tax across all forms of alcohol would be strong. However, such a neutral situation does not exist, with some forms of alcohol imposing much higher rates of social costs (that is, negative externalities) than others. In this situation, the case for a non-neutral alcohol tax regime, designed to discriminate against forms of alcohol consumption known to impose substantial social costs, is strong. By the same logic, the case for discriminating in favour of forms of consumption which impose comparatively low social costs is also strong.

For example, studies show that young people are more influenced by the price of alcohol so that increasing the tax rate on alcoholic drinks which are specifically targeted at the youth market (for example, alcopops) is likely to be effective. According to the British Medical Association (2008) study, 45 per cent of all individuals who consumed alcopops frequently were not aware of the number of units of alcohol in their drinks. There would appear to be strong justification for the April 2008 increase in the Australian tax on pre-mixed drinks (alcopops) by 70 per cent.

Reform of the tax system to achieve these objectives would require relatively recent research on the demand elasticities for the various types of alcoholic beverages (for example, those categories already targeted in excise taxation). There appears to be little or no recent Australian research in this area. It is not, however, necessary to have recent estimates of demand elasticities to be able to assert that an alcohol tax regime could be designed to achieve almost any reasonable reduction in the level, and change in the structure, of alcohol demand.

Such a sophisticated system of alcohol taxation would have both specific and general effects. It could target specific forms of alcohol abuse by raising the price of forms of alcohol subject to hazardous or harmful consumption. It would also have the effect of producing a decline in the overall level of alcohol consumption. Thus the approach here would be to determine the target rate of decline of alcohol consumption and then to design a tax system to achieve that target. For the purposes of the present paper, it will be sufficient to determine the target.

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In the current economic environment, a proposal to increase alcohol taxation may well meet the objection that it is likely to add to inflationary pressures. This would be a shortterm objection, perhaps even a short-sighted one, which could be countered by a variety of arguments. There remains the issue of determining the target level of reduction in alcohol consumption and/or abuse. It would be possible by the use of tax instruments to achieve almost any level of reduction in per capita alcohol consumption, as long as tax rates were not so high as to encourage large-scale alcohol smuggling or illicit alcohol production. It is the view of the present authors that the performance of other countries having similar economic and social characteristics should be taken as a guide for target reductions in per capita alcohol consumption. Thus, we have selected estimates of social cost reductions based on the performances of Norway, the comparable country with the lowest per capita rate, together with United States and Italy. As the United States and Italy are both significant wine producers, it may be that one of these is the more appropriate comparator.

It is assumed that a given percentage reduction in per capita alcohol consumption would lead to a similar percentage reduction in the social costs of alcohol abuse. The percentage reductions applied in the estimates are derived from Table 5 above and shown in Table 8.

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5.1.1 Potential reductions in social costs from the use of alcohol taxation

Estimates of the reductions in the social costs of alcohol abuse which could be achieved over time through appropriately increased levels of alcohol taxation are presented in the following table.

Table 8. Potential reductions in social costs resulting from increased alcohol taxation (2004/05 prices)

Norway United States Italy
Reduction in other countries’ per capita alcohol consumption38.8 per cent 14.3 per cent 18.4 per cent
Reduction in Australian social costs
$m
$m
$m
Total tangible costs
4,200
1,550
1,990
Total intangible costs
1,740
640
820
Reduction in total Australian social costs
5,940
2,190
2,810

On the basis of Norwegian performance in 2003 (measured by per capita alcohol consumption), it is estimated that it would be possible eventually to reduce total Australian alcohol abuse costs (measured at 2004/05 prices) by $5.9 billion. United States performance would indicate a potential reduction of $2.2 billion and Italian performance $2.8 billion. Since it cannot be assumed that the individual components of these costs would all be reduced by the same percentages, we do not present here a disaggregation of these costs into their individual categories.

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