The taxman follows you into your local pub

Kristian Niemietz

17 February 2012

Economists often try to explain that the cost of a tax is not simply the sum of money we hand over to the exchequer. Almost all taxes cause distortions by interfering with our behaviour, and although less visible, that is often the more substantial part of the cost of a tax.

An obvious response to a tax is to carry out fewer of the transactions that the tax applies to. So other things equal, in a high-tax economy, there will be more do-it-yourself provision, less internal trade and a less sophisticated division of labour than in a low-tax economy. When taxes are imposed in a selective rather than uniform fashion, there will be additional efficiency losses, as people will try to shift away from the higher-taxed towards the lower-taxed activities. Not to mention the time and effort dedicated to working out ways around taxes.

But enough abstraction. Tax distortions are all around us, and if you have recently been to a pub and found your pint a bit flabby, chances are that you have experienced one of them. The Economist reckons that the current trend towards beers with lower alcohol levels is driven by tax considerations.

It is easy to see why. Alcohol duty rates for beer are proportional to alcohol content, with a rate of about 11p per percentage point of alcohol in a standard pint. That might explain anomalies like ‘Becks Vier’, which is hyped heavily in the UK, but unknown in the brewery’s home market. It might also explain the presence of beers with an alcohol level of exactly 2.8%: That is the threshold above which the conventional beer duty applies, with a reduced rate for beers not exceeding this level. As soon as the threshold is crossed, the tax level doubles.

Beer duties are just the tip of the iceberg; the taxman’s influence on what goes on inside the pub extends well beyond that. The alcohol duty system is a highly selective, multiple-rate system which treats different sources of alcohol very differently (even still cider and sparkling cider have separate rates) and which introduces all sorts of weird jumps at arbitrary thresholds. The tax treatment of wine is especially harsh, with 60p per glass going straight to the exchequer. Cider comes off relatively lightly when its alcohol content is no higher than 5.5%, but is heavily penalised when stronger than that. Thus, the tax system exerts a heavy influence not just on how much, but also on what people drink. And that should also be considered part of the cost of excise taxes.

A more streamlined system would obviously be less bad, but in fact, alcohol duties should not exist at all. Alcoholic beverages are taxed with the standard VAT rate, and that is more than enough already. The conventional argument about externalities in alcohol consumption – the cost of treating intoxications, and the increase in the incidence of brawls – is easily addressed: Send the full bill to everybody who is hospitalised with alcohol intoxication. Raise fines and speed up trials for troublemakers.

Tags: alcohol, Kristian Niemietz, tax, Tax and fiscal policy

Submitted by Tony Penman on Fri, 17/02/2012 - 14:46.

Of course alcohol taxes are by and large also highly regressive with those on lower incomes bearing a relatively bigger share of the tax burden. But of course there are understandable reasons why taxing alcohol remains an ever attractive target for the government; such taxes are easy to collect and relatively easy to sell to the public on the basis of the negative externalities attendant to alcohol consumption. I assume that the argument for multiple rates essentially is based around seeking to maximise revenue/relative elasticities of demand. Thus I expect that champagne has high levels of duty on the basis that there are few substitutes and as such its demand is relatively inelastic (given its inflated presence in minds of A B and C1s). I also assume that this explains the difference in the taxation of wine and cider where changes in price have more pronounced effects on consumption with the tax burden falls heavily on producers. Thankfully the UK doesn’t have a wine industry to speak of.

Submitted by Kris on Fri, 17/02/2012 - 16:32.

Tony, I rather suspect its precisely the absence of a domestic wine industry (and thus of a domestic lobby group) which explains the harsh tax treatment.

Submitted by Tony Penman on Fri, 17/02/2012 - 17:54.

Indeed that was the point I was awkardly making.

Submitted by Philip on Fri, 17/02/2012 - 18:13.

Tony - do you know what is the New Zealand experience here? There are three rational positions... 1. don't tax alcohol at all (other than VAT) 2. tax it in inverse proportion to elasticities (Ramsey rules) 3. be simple and just tax all alcohol according to its alcohol content. As Kris has noted domestic lobby groups might be relevant too. In New Zealand they have had a reforming "flatter tax" government and also a rapidly growing wine industry because of the reforms to farming. It would be interesting to know the effect of either or both of those on alcohol taxing.

Submitted by Jonathan Bagley on Fri, 17/02/2012 - 18:29.

Alcohol taxes are easy to collect only because they have, up to now, been set at a rate the public is largely happy with. To the consumer, a minimum alcohol price of 50p per unit is indistinguishable from a tax. Decent wine can be made very easily at home from wine kits at a cost of around £1.20 per bottle, Decent table wine can be bought in France for £2. If the price of a bottle of wine is raised from £3.49 to £4.69, expect the UKBA to be extremely busy, and a huge increase in home made wine.

Submitted by Tony Penman on Fri, 17/02/2012 - 18:49.

I would hazard a guess and suggest that such excises have been imposed without any particular tax policy framework and that alcohol tax has grown merely in accord with government’s demands for revenue. Spirits are taxed at rates almost twice that of other alcoholic beverages (on alcohol content) and there appears to be no consideration of either elasticity of demand (or supply) in shaping the regime. There was an attempt by Treasury to reform excise duties (really only part of NZ tax system that has not been reformed since Labour’s dramatic reforms of the 1980s) in the early 2000s but it went nowhere. NZ wine is taxed at the same rate as imported wines and is subject to higher rates of tax than the current GST rate (12.5%). The NZ wine industry receives no direct government subsidy nor favourable treatment under accounting/tax rules. It is in something of a state of flux at the moment given rapid expansion in last 20 years.

Submitted by Kris on Fri, 17/02/2012 - 18:59.

That would probably delight the New Economics Foundation: less supermarket purchases (evil), more home production (virtuous). Hope it won't get that far, there's something to be said for the division of labour.

Submitted by Joe McCaffrey on Sat, 18/02/2012 - 11:45.

The externalities are created by the system of socialised medical care through the NHS, they are not true externalities in the conventional sense - the way to adress this, as with a very large number of externalities, is to sell the NHS hospitals to private providers and move to a freemarket in medical care: it also has the added benefit of being the only way that economic collapse driven by unsustainable government spending can be avoided over the longer term

Submitted by Richard Naisby on Sat, 18/02/2012 - 13:00.

It is a myth that UK duty rates favour beer over wine. The duty rate charged on beer can be as much as 44% higher than equivalent strength wine (at 15% beer=£348.15/hl% ; at 15% wine=£241.43/hl%). When one considers the relative importance of the UK brewery and wine sectors (both in terms of employment and overall tax take) this is a crazy situation. From a public health perspective the situation make even less sense given that most UK beer is consumed in a supervised and social environment (the pub) while wine is largely consumed unsupervised.

Submitted by Kris on Sat, 18/02/2012 - 16:03.

Richard, of course the system generally favours beer over wine (even though that's not the way I'd phrase it, I'd rather say it penalises beer consumption while penalising wine consumption even more). You're using a very fabricated example: Given the proportional structure of beer duty, of course a 15%-beer is taxed extremely heavily. That's why it's so hard to find Bock beer here. But for a 5%-beer, the rate is 93p per litre: Too much (it should be zero), but not nearly as steep as for wine. Meanwhile, 15% is one of those critical thresholds described above; as soon as that threshold is crossed, the wine duty rate jumps from £2.41 per litre to £3.21.

Submitted by Philip on Sat, 18/02/2012 - 17:50.

Sorry, Kris, I don't get this. Surely all wine is less then 15% or it is fortified wine (I realise that that is not a definition but it roughly corresponds to the reality). A typical wine might be 12.5% so that £2.41 tax is the tax for 12.5%. The beer comes in at 93p for a 5% beer (that's pretty strong for a beer but not outrageously so). Per % of alcohol they are both pretty close are they not?

Submitted by Richard Naisby on Sat, 18/02/2012 - 18:52.

It's no surprise that is it difficult to find Bock beer in the UK. It is a German style of beer which, though usually good, has no roots in British culture. Barley Wines, IPAs, Porters and Imperial Stouts, all of which are a fundamental part of British heritage and a great cultural export are equally discriminated against. If governmental intervention had the intention of limiting alcohol consumption per se then wine (as a generically high alcohol fermented product) would be expected to bear higher respective per % duties than beer (a lower alcohol - "healthy" alternative). It would be interesting to see studies examine the effect of per-container duties in lieu of hl% duties on British alcohol consumption. A combination of the duties is easy to conceive of and can be made revenue neutral. The supermarkets would no doubt hate any change and probably wield too much political clout to see this enacted but I believe the experiment has been very successful in certain Baltic countries. I can expand if interested.

Submitted by Jon on Sat, 18/02/2012 - 23:29.

"Send the full bill to everybody who is hospitalised with alcohol intoxication." Nice idea, but how does that help reimburse all those who suffer the anonymous attentions of weekend underage drinkers, who wreck peoples cars and property and cause other problems of antisocial behaviour because they have got smashed on the cheapest supermarket alcohol that their older siblings will buy for them? The police can't handle these kids, and barely even class their behaviour as a problem - to the kids concerned, being chased around by the police at the weekend is just part of the fun as they know that ultimately they are safe provided they keep their (bad) behaviour within certain bounds and back up each others alibis. The simplest way IMO to tackle such behaviour is to set a minimum price for alcohol - that will in any case only affect the cheapest alcohol (that frankly, is marketed almost entirely at youngsters) sold by supermarkets - but which has been shown elsewhere to have a real effect on consumption. If a few responsible drinkers have to do with a bit less, then I'm afraid that is hard luck, but at least they will also share the benefit of having less anti-social behaviour to put up with. The additional benefit of course is that this will make drinking in pubs relatively less expensive by removing the below cost "competition" that they suffer from imposed on them by supermarkets, and perhaps this will help to protect some of the really socially valuable small pubs that are currently so under threat.

Submitted by Richard Naisby on Sun, 19/02/2012 - 02:25.

re : Jon's comments. This is where the "container tax" idea is better, and more acceptable under EU legislation, idea than minimum pricing for alcohol. Set the new "alcohol container tax" at 50p per container; set duty rates to make the change revenue neutral - so for the following numbers apply common sense!. Roughly speaking the new cost to the consumer would be : per can of fighting lager in a supermarket : 50p i.e. 120% price increase. Bottle of supermarket wine 50p : 10% increase. Pub pint (this is where it gets fun!) - 0.5p - most pubs buy beer in 72 or 144 pint casks - so this tax (easy to administer and also cheap - all participants have HMRC accounts- by law) adds almost nothing to the cost of supervised beer sales (it also adds very little to the cost of supervised wine, spirits or any other alcoholic drinks sales). Balanced by an equivalent duty reduction it would be supported by the vast majority of brewers in the UK (but probably not the ones who can afford HoC lobbyists!) Pre-loading - the phenomenon by which leads pubs to be held responsible for earlier idiot drinking - would cease to be economic; and a lot of illiberal regulation regarding the night time economy could be paused - pending abolition.

Submitted by Kris on Sun, 19/02/2012 - 15:36.

Philip, OK, in that case, beer and wine rates per percentage point of alcohol are indeed close. I had a 10%-wine in mind, in which case the difference is bigger. It's hard to compare because of the different rate structures. It's like having a progressive income tax for one type of earned income, and a flat tax for another type of earned income. I haven't found fortified wine as a separate category, but yes, I suppose it is fair to interpret the higher rate of wine duty (for alcohol >15%) as effectively a rate for fortified wines.

Submitted by Richard Naisby on Sun, 19/02/2012 - 22:52.

Philip : your point is correct (though I'd say 12.5% is a rather low average for wine in the UK in 2012) but you miss the effect of High Strength Beer Duty which massively penalises the production of beers in the 7.5%+ category (a category into which almost all wine would fall). Even 15%+ wines, which fall into the higher duty regime, are taxed significantly less heavily than equivalent strength beers. The UK beer production industry is large, the UK wine industry is small and the UK strong wine industry is vanishingly small. There are NO duties payable on small cider production (of whatever strength) and even mass cider production is taxed much less harshly than either wine or beer (hence cider being the drink of choice for tramps - if you want to see classic market in action then seek out a park bench - where bang for your buck is everything!) Both wine and cider have significantly lower production cost than beer, a fact which used to be recognised in the respective taxation regimes, but is no longer. The relative duties levied against spirits vs beer over the last 20 years represent a kind of alcoholic Barnett formula (but think of the origin of the various Chancellors of the Exchequer during that time and it is obvious why!)

Submitted by Richard Naisby on Sun, 19/02/2012 - 22:56.

Kris : name a 10% wine! Most wine sold in the UK is now 13%+ (including whites). It is not difficult to find table wine which is now taxed at the higher duty rate (though obviously this is unlikely to be an area of the market likely to be significant until duty change occurs)

Submitted by Kris on Mon, 20/02/2012 - 17:41.

Richard, OK, point taken.

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