Cheers! We’re (possibly) efficiently taxing ourselves – Alcohol in NZ

A few medical experts and lobbyists are calling for a “massive” hike in alcohol prices to solve a “national booze problem”.

According to the article, alcohol costs $425 million in ACC payouts, $655 million in the public health sector, and $1.17 billion in lost productivity each year and is a contributing factor to 70 per cent of emergency hospital admissions and well over half of all crime.

Alcohol is a product that is already heavily taxed. The question is: is the current level of alcohol tax sufficient to internalise all costs of alcohol consumption (including those outlined above)?

As pointed out elsewhere, in a world of perfect information the excise would be levied on each alcohol consumer according to the actual external costs of their last drink. In the real world, the most feasible approach is to impose a uniform excise across all consumers according to the absolute alcohol content of the product purchased. The tax revenue generated from such an excise should just cover the total costs of consumption on efficiency grounds.

The most recent New Zealand paper on the issue (at least that I could find) was published by Treasury in 2002, using 1990s data. In that year the amount of revenue collected from the tax on alcohol was $580 million. According to the Treasury, this is near the mid-point of the estimated bound of the external tangible costs of alcohol ($608 million), which include costs for Hospital resources, ACC, Ministry of transport, Police, Penal institutions, Community sentencing, Periodic sentencing, Court costs, and Production.

The Treasury conclude that the then current rate of excise tax could be justified on externality grounds. “As total external costs include a number of other intangible costs the total external costs are likely to be significantly more than the revenue collected. A case to increase the excise would need to show that these costs are significant and that tax was the best tool to address these costs.”

The costs in the study from the 1990s were significantly less than the headline costs used in the article. I suspect that the cost of externalities from alcohol consumption have increased somewhat over this period. However, the revenue gathered from alcohol taxation has also increased steadily over this period. To the extent that one has increased at a greater rate than the other, there could be a case for increasing (or decreasing) the current taxes on alcohol.

My point is that simply looking at the total costs of alcohol consumption without looking at the revenue gathered from consumption is misleading and does not tell us whether alcohol taxes should be increased or otherwise.

I thought it was also interesting that those clamouring for a significant increase in tax were also suggesting that the number of liquor outlets be reduced. If the ‘price’ of alcohol was accurately set to internalise externalities, why the need to implement quantity rationing too? I note that another TVHE post has covered this point, with a very nice argument that suggests those with lower opportunity costs of time, and hence lower transaction costs associated with travelling further to purchase alcohol, are probably those most likely to cost society in terms of their drinking behaviour.

I’d rather prefer that education be used to inform consumers of the true cost of drinking. Such information provision already occurs through organisations such as ALAC, a body that is incidentally funded by a levy on alcohol produced and imported for sale in New Zealand.

6 replies
  1. goonix
    goonix says:

    It is me here but for some reason I can’t log in.

    I noted that the front page of the DomPost Weekend did contain a few more stats that were not presented on the linked website article, including the revenue gained from alcohol taxes. From memory it was around $750m per year.

  2. Eric Crampton
    Eric Crampton says:

    It would be interesting to work out the extent to which negative externalities are optimally internalized via tax that correlates with usage rather than directly with production of negative externalities as compared with increased fines for actual generation of said externalities. The latter brings with it enforcement costs but is much better targeted. In other words, does it make more sense to increase excise taxes or to bring in a $2000 fine for a “drunk and disorderly” misdemeanor.

  3. CPW
    CPW says:

    What about positive externalities? It’s been my experience that drinking with others is more pleasant than drinking alone 😛

  4. Eric Crampton
    Eric Crampton says:

    Actually, there’s good evidence for positive effects of alcohol. Ed Stringham at San Jose State in the US has found that drinkers earn more money than non-drinkers. If the anti-alcohol lobby insists on continually including private costs as social costs, then we surely ought to include consumer surplus from drinking AND all of the positive wage effects. Short version of Stringham’s argument: drinkers have better social networks.

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