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
Table of contents
- List of tables
- List of abbreviations
- Executive summary
- Acknowledgments
- 1. Introduction
- 2. A brief summary of methodological issues
- 3. The aggregate social costs of alcohol
4. Estimating the Feasible Minimum in practice
5. The intervention choices- 6. Effective interventions whose benefits cannot be evaluated
- 7. Summary of results
- 8. Conclusions
- 9. Research recommendations
- Appendix A. Methodological issues
- Reference
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
 | Effectiveness | Breadth of research support | Cost efficiency |
|---|---|---|---|
| Taxes | +++ | +++ | +++ |
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:
- Goods and Services Tax (GST);
- customs duties;
- excise duties; and
- Wine Equalisation Tax (WET).
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
following categories:
- Draught beer
– low strength
– mid strength
– high strength - Other beer
– low strength
– mid strength
– high strength - Non-commercial beer
– low strength
– mid and high strength - Other beverages not exceeding 10 per cent of alcohol content
- Potable spirits
– brandy
– other spirits, exceeding 10 per cent alcohol content.
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.
- Since the tax is a tax on a final consumption good rather than on an input into the production of other goods and services, the inflationary effect is likely to be relatively short-term. There would be a one-off rise in alcohol price levels but a continuing higher inflation rate extending over more than one quarter would be unlikely. An alcohol tax increase would result in a rise in the ‘headline’ rate of inflation rather than in the longer-term underlying rate.
- The resulting reduced level of alcohol abuse, and associated social costs, would be likely to lead to increased efficiency in the Australian economy. For example, by reducing the effects of alcohol abuse on workplace productivity, it would assist in reducing current labour shortages. • It would reduce the public expenditures of both federal and state governments, particularly in the areas of health services and crime.
- The increased alcohol tax revenue would, by offering the ability to increase federal government surpluses, provide the potential to reduce inflationary pressures.
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 consumption | 38.8 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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