Our recent article in BMJ Global Health shows evidence of the effectiveness of alcohol taxes (and tobacco and sugar-sweetened beverages (SSB) taxes) in increasing prices, decreasing consumption, and increasing social well-being, especially among poorer individuals, who usually face higher financial impacts from alcohol-related illnesses.[1] Effects on employment are vastly exaggerated or non-existent. The body of scientific evidence pointing towards the effectiveness of alcohol taxes is overwhelming for developed countries, and it is mounting in developing countries.
The economic rationality for taxes
Despite the efforts of the alcohol industry to discredit it, there is almost no doubt that taxes are an effective economic and public health tool to decrease the consumption of alcoholic beverages.[2] Economically, these taxes contribute to correcting for externalities (i.e., costs of alcohol harm borne by society, such as traffic accidents, domestic violence, crime, etc.) and internalities (i.e., costs that arise to the drinker in the future and are not adequately considered by them when consuming). Contrary to most taxes, alcohol taxes increase economic efficiency by signalling to consumers the social costs of consumption. In addition, they are a source of fiscal revenues that may be destined for the treatment and prevention of alcohol-related conditions.
The evidence shows that increasing taxes is effective in raising alcohol prices. A review found that taxes are generally overshifted (the increase in prices is larger than the increase in taxes) in the case of beer and fully shifted (the rise in prices is similar to the increase in taxes) for wines and spirits.[3] Generally, producers tend to overshift taxes for relatively expensive drinks and fully shift or undershift (the taxes are not fully passed to prices) cheaper drinks.[4, 5]
Once prices increase, demand falls. The logic of the demand law, which holds for houses, bread, clothes, and virtually every product, also holds for alcoholic drinks. On average, an increase of 10% in the price of alcoholic beverages reduces demand by 5% [6], though certain drinks (e.g., beers) are less responsive than others (e.g., wine, spirits)[7, 8]. The evidence shows little or no evidence of differences in demand sensitivity by gender or age.[6] Interestingly, there is evidence that prices delay or prevent initiation and can also affect the life pattern of consumption.[9]
The scare tactics
Industries such as alcohol, tobacco, gambling, and food often rely on similar tactics to avoid, divert, or prevent regulatory policies affecting their products, especially taxes. These tactics, remarkably similar despite the differences in products, consist of affirming that regulatory solutions, notably taxes, are too simplistic to correct complex issues, such as the ‘abuse’ of alcohol.[10] Instead of taxation, they often propose education to consumers, even when they staunchly and consistently oppose regulations on advertisement, product labelling, etc.
In addition, the alcohol industry often claims that tax increases have at least two undesirable effects: an increase in unemployment and a negative financial impact on poorer households (i.e., taxes are regressive). The first argument claims that because of taxation, demand for alcoholic beverages decreases (so they work!), and that hurts employment in the alcohol industry, bars, restaurants, etc. This partial equilibrium argument is simplistic and denies the general equilibrium impact of taxes. When consumers decrease demand for alcoholic beverages, they switch to other products and services that increase their demand, creating employment in those sectors.[11] Moreover, when governments spend the revenues generated by taxes, they also create employment. Simulation studies conducted for states in the US find that government expenditures, usually in labour-intensive services, contribute to generating net employment when alcohol taxes are increased.[12]
The regressivity argument is also simplistic and based on a partial equilibrium analysis: because poorer households spend a larger fraction of their income on alcohol than more affluent households, taxation will worsen that situation. This “logic” misses two crucial points: because poorer households devote a larger share of their budget to alcoholic beverages, they are more sensitive to price increases. Hence, after taxation, poorer households may see their alcohol-related budget share decrease. The second point is that poorer households suffer disproportionally more the consequences of alcohol-related illnesses. Their access to the health system is imperfect, often leading to significant out-of-pocket payments (with a substantial financial impact). In addition, poorer households have a considerably larger proportion of members working in informal labour markets, where missing working days (because of alcohol-related illnesses) often implies a direct reduction in household income. A study for the UK analysing the distributional effect of alcohol taxes found no evidence of their regressivity. It concluded that the taxes can be strongly progressive once the tax revenues are considered.[13]
Conclusions
The health and economic costs of alcohol consumption are undeniable, as is the fact that alcohol taxation is an effective tool to curb such consumption. Countries face increasing health costs in the future because of the increased longevity of their populations. It is crucial, then, to improve the health of individuals so that they can remain healthier well into older age. Unless societies reduce the prevalence of preventable chronic diseases, the burden of health budgets on society will be unsustainable.
Alcohol taxes are not only a tool to increase revenues but, more importantly, an effective instrument to improve populations’ health and decrease healthcare costs, protect vulnerable populations (e.g., children, poorer households), and even improve economic efficiency by signalling the true social cost of consumption.
Written by Dr Guillermo Paraje, Professor of Economics, Universidad Adolfo Ibáñez Business School, Chile.
All IAS Blogposts are published with the permission of the author. The views expressed are solely the author’s own and do not necessarily represent the views of the Institute of Alcohol Studies.
1. Paraje G, Jha P, Savedoff W, Fuchs A. Taxation of tobacco, alcohol, and sugar-sweetened beverages: reviewing the evidence and dispelling the myths. BMJ Global Health 2023;8(Suppl 8):e011866 doi: 10.1136/bmjgh-2023-011866.
2. World Health Organisation. Tackling NCDs: ‘best buys’ and other recommended interventions for the prevention and control of noncommunicable diseases. In: Organisation WH, ed. Geneva, Switzerland, 2017.
3. Nelson JP, Moran JR. Effects of Alcohol Taxation on Prices: A Systematic Review and Meta-Analysis of Pass-Through Rates. The B.E. Journal of Economic Analysis & Policy 2020;20(1):20190134 doi: https://doi.org/10.1515/bejeap-2019-0134.
4. Ally AK, Meng Y, Chakraborty R, et al. Alcohol tax pass-through across the product and price range: do retailers treat cheap alcohol differently? Addiction 2014;109(12):1994-2002 doi: 10.1111/add.12590 [published Online First: 2014/06/25].
5. Shang C, Ngo A, Chaloupka FJ. The pass-through of alcohol excise taxes to prices in OECD countries. Eur J Health Econ 2020;21(6):855-67 doi: 10.1007/s10198-020-01177-w [published Online First: 2020/04/03].
6. Gallet CA. The demand for alcohol: a meta-analysis of elasticities. Australian Journal of Agricultural and Resource Economics 2007;51(2):121-35 doi: 10.1111/j.1467-8489.2007.00365.x.
7. Chaloupka FJ, Powell LM. Health Taxes to Save Lives. Background materials: Case Studies. In: Philathropies B, ed. New York: Bloomberg Philanthropies, 2019.
8. Guindon GE, Zhao K, Fatima T, et al. Prices, taxes and alcohol use: a systematic umbrella review. Addiction 2022;n/a(n/a) doi: https://doi.org/10.1111/add.15966.
9. Paraje GR, Guindon GE, Chaloupka FJ. Prices, alcohol use initiation and heavy episodic drinking among Chilean youth. Addiction 2020;n/a(n/a) doi: 10.1111/add.15167.
10. Petticrew M, Katikireddi SV, Knai C, et al. ‘Nothing can be done until everything is done’: the use of complexity arguments by food, beverage, alcohol and gambling industries. Journal of epidemiology and community health 2017.
11. Chaloupka FJ, Powell LM. Using Fiscal Policy to Promote Health: Taxing Tobacco, Alcohol, and Sugary Beverages. In: Philathropies B, ed. Prepared for the Task Force on Fiscal Policy for Health. New York: Bloomberg Philanthropies, 2018.
12. Wada R, Chaloupka FJ, Powell LM, Jernigan DH. Employment impacts of alcohol taxes. Preventive medicine 2017;105:S50-S55 doi: https://doi.org/10.1016/j.ypmed.2017.08.013.
13. Bhattacharya A. Who pays the tab? The distributional effects of UK alcohol taxes. In: Studies IoA, ed. London, UK: Institute of Alcohol Studies, 2020.