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Calling time on alcohol taxation in Australia

Alcohol is a prime target for taxation. It’s a good source of government revenue; it allows governments to recoup costs for providing services to drinkers (such as accident and emergency care and policing…

Australia’s approach to alcohol taxation is riddled with inconsistencies. Johnsyweb

Alcohol is a prime target for taxation. It’s a good source of government revenue; it allows governments to recoup costs for providing services to drinkers (such as accident and emergency care and policing); it provides a mechanism for drinkers to pay for the harm they impose on others as a consequence of their drinking; it helps discourage excessive drinking due to information failure (not all drinkers are aware of all the risks of drinking and some harms are not yet understood) and drinkers’ tendency to discount the long-term harms of alcohol; and reduced consumption of alcohol has known public health benefits. Moreover, a recent Australian review of the evidence clearly showed alcohol taxation is cost-effective.

Given the utility and cost-effectiveness of alcohol taxation, the challenge is to identify an optimally efficient tax system: one that maximises the potential benefits of restrained alcohol consumption for the least amount of cost to those who don’t consume alcohol to excess.

If an economist was asked to design the least efficient alcohol taxation system imaginable, it would more or less approximate the current Australian system. It would be blatantly unfair to lay the blame for this situation at the feet of any particular Commonwealth government. The current system is, ahem, a cocktail of mixed methodologies, ideologies, idiosyncrasies and the remnant battle-lines of long-forgotten policy negotiations.

Essentially, alcohol can be taxed as either a fixed amount per volume of alcohol (a fixed rate of tax per standard drink) or as a proportion of the wholesale price. Australia has both at the same time. Wine is taxed as a proportion of the wholesale price (called the wine equalisation tax), which means the tax applied to cask wine (around 60 cents per litre) is much lower than bottled wine (around $2.60 per litre) because it has a lower wholesale price.

All other types of alcohol products are taxed as a fixed amount per standard drink, although the fixed rate varies, not only between different types of beverages (beer and spirits, for example) but also between different types of containers (such as kegs and stubbies). In other words, you pay between 5 cents and nearly $1 in tax on your alcohol, depending on whether you buy draught beer, bottled beer, mid or high-strength beer, cheap wine, expensive wine, cider, straight spirits, pre-mixed spirits or brandy.

Although tinkering with the current alcohol tax system is tempting - because it is easier to negotiate amendments than an overhaul - perhaps it is time to draw breath and go for broke: take the lead from Apple’s army of geeks and scrap the current operating system in favour of a new, more efficient one. What might this look like? Let’s go back to our definition of optimal efficiency: maximise the benefits (in other words, reduce harms) and minimise the impact on those who don’t drink to excess.

Since alcohol harm is not beverage-specific (drinking too much is drinking too much), the most efficient method is to tax the alcohol, not the beverage type or its price. That would remove perverse incentives that currently distort drinkers’ choices between beverage types and would optimise the compensation paid by drinkers for increasing risks of harm and government costs, and reducing public health.

Taxing the alcohol content, known as a volumetric tax, requires a decision about the appropriate rate of tax per unit of alcohol and moving to this system will inevitably create winners and losers (essentially wine and beer would be relatively more expensive, while spirits would be relatively cheaper), but the principle is infinitely closer to optimal efficiency than is currently the case. Our modelling shows a volumetric tax would deliver both significant health gains and increased taxation revenue, compared to the existing taxation system.

However, a volumetric tax is not the only price control mechanism that could sensibly be utilised, for two reasons. First, although drinkers are sensitive to changes in alcohol prices, they are relatively price inelastic (that is, demand remains relatively strong despite price rises), which means there is a limit to how high the volumetric tax could be set before it unfairly impacts on relatively light drinkers.

Second, there is more than one type of harmful alcohol consumption: drinking too much on average; and drinking too much on one occasion (getting drunk).

Our modelling suggests that in response to a price increase, Australians will increase the number of days on which they do not drink at all (and reduce the number of days on which they only drink a bit) in order to preserve their financial ability to drink more heavily on the weekend. This suggests some people just like to get drunk, and you can do that quite a few times and still work out that the most financially savvy way to get drunk is to drink the cheapest alcohol. A volumetric tax would help inhibit such drinking but could be reinforced by complementary pricing controls, such as a minimum retail price (or floor price). Scotland and England have indicated they will introduce this strategy in 2012.

Unlike the current situation, this mix of price control strategies is not attempting to idiosyncratically amend one taxation system: it is a synthesis of two separate and equitable approaches. A volumetric tax would effectively transfer funds to the government to compensate them for the cost of mopping up the harms from excessive drinking, while a floor price would inhibit the availability of cheap alcohol. The practical difficulties of negotiating the introduction of a more optimal alcohol tax system are daunting and will require skilled politics, but it is time to untangle the mess. And it seems fair that researchers advocating for change ought equally be accountable for measuring the impact of a more optimal alcohol tax system. To paraphrase Dostoevsky: drinkers, politicians and researchers are all responsible for all.

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10 Comments sorted by

  1. Jack Arnold


    An interesting background article that offers few recommendations.

    Perhaps the tax could be based on the "number of drinks" so that beer drinkers swilling 5% industrially manufactured alcohol would not impact upon the cognescenti sipping 14% export quality bottled table wines from wineries that take years & thousands of dollars for family farms to develop.

    Now what is the export value of the wine industry at present?? Equally important, what is the present value to the local economy of urban regional centres forgotten by metropolitan based governments?

    1. Citizen SG


      In reply to Jack Arnold

      So alcoholic beverages should be taxed by virtue of a scoring system imposed by'cognescenti' and by virtue of proximity to regional urban centers..... That's fair and uncomplicated.

  2. Grendelus Malleolus

    Senior Nerd

    I wonder what other markets might shift as a result. Home brew kits would be a good investment, although that always has some natural limitations in popularity and volume. The concept of a floor price fr alcohol isinteresting and it will be interesting to see how this changes behaviors of drinkers in Scotland and England.

  3. Daryl Deal


    Does it really?

    For example in 2008/9, Federal excise tax on alcohol, raised a mere $6 billion dollars. Combined expenses of Health, Community Services and Social Security/Welfare was well in the region of excess of $154.6 billion dollars

    One paper I encountered indicate a study of G20 countries the community costs of alcoholism range from 0.45% to 5.4% of the countries GDP.

    "Alcohol exerts a substantial economic burden worldwide . The need for estimates of the economic cost of alcohol is…

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  4. Grischa

    logged in via Twitter

    A very anglo-centric and single/tax-minded view.
    My suggestion is to lower drinking age for wine and beer to 16 and teach people to drink responsibly and to not drink to get drunk.
    People who are trusted and expected to act responsibly will invariably tend to do so.
    In Germany a half-litre bottle of beer costs between 30 and 90 AU cents, and they are doing quite well.

  5. Gil Hardwick

    anthropologist, historian, novelist, editor and publisher at eBooks West

    The option is always available to brew your own beer. Wine too is exceptionally easy to make, a nice grapella you don't even have to bottle since not made to transport or age, with the added bonus that to keep making it you have to keep yourself reasonably sober.

    For nearly 20 years I am still able to make 2 1/2 cartons of beer for less than I can buy a six-pack, which makes the hobby very highly productive and with almost unimaginable savings. I really do have to explain it to people who are simply conditioned to accept the high price they pay for alcohol at retail. The investment is not good it's exceptional.

    In Australia there are also small legal stills available for those who prefer spirits to beer or wine, where again self-regulation is inherent in staying sober enough to make the next batch.

  6. Stephen Riden

    Research and Information Manager, DSICA

    If all alcohol products were taxed volumetrically, there would be no role for a minimum price regulation and the additional cost of monitoring and enforcing it.

    The debate for minimum prices in Australia is entirely around very cheap wine and that is solely due to the operation of the Wine Equalisation Tax, made worse during a huge wine glut making wineries desperate to sell at any price.

    The rate of the excise tax (on a per litre of alcohol basis for the non-tax experts) would effectively…

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  7. stephen beaufils

    engineering tradesman

    Alcohol should be taxed only on the amount of alcohol in the product this is fair, it also brings to mind that beer and wine are predominately Australian made and a excise volumetricaly only hurts Australian manufacturers and
    Australian drinkers. It is not the role of the government to dictate what or how much we consume I can assure them (the moral do gooders) on a whole we are able to look out for ourselves.