Tax On Alcohol

Should there be a specific tax on Alcohol?
Introduction
Specific and percentage tax is one of the fundamentals early on in the book, and that
most people have knowledge about since most people have to pay them. Taxes are
a great way for the government to collect money to either subsidise schools and
hospitals or cover the costs a certain product causes.
Connection to the article
The article states that there is an unfair tax rate on alcohol which causes “occasional
or non-drinkers” to carry the high taxes. It also states that there should be a specific
tax on alcohol instead of a tax on different units of alcohol. I am going to look at this
in depth and to see if this is indeed a good idea.
Analysis
Unlike a percentage tax a specific tax is a fixed amount of tax imposed on the selling
price of a product, this will affect the demand for a product differently considering
how elastic or inelastic the demand curve of a product is. There are many reasons to
impose a tax on a product but for this situation it is to compensate for the
externalities alcohol causes and an externality can be defined as a cost on a third
party and are tended to be avoided by governments whether it be positive or
negative externalities.
The reason a government might impose a tax on different units of alcohol is to cover
the externality costs of alcohol, and maybe get extra tax revenue for further
government subsidies. This is a great idea, to tax a unit of alcohol with more quantity
demanded, is to try to increase the tax revenue for the government in the long run.
This can be demonstrated with the following diagram.
Furthermore, these graphs show us the extent of the “unfair tax rate” on the units of
alcohol and to what extent the government Is increasing their tax revenue. The tax
revenue box for the government (P2, Y, W, C) is larger in scale with the greater tax.
Although the tax might be greater, the tax burden for ordinary wine is mostly paid by
consumers whereas the higher tax in sparkly wine, producers and consumers seem
to have exactly identical tax burdens.
As the article states; if the government sets a specific tax of 9p on alcohol it should
cover all the externalities of consumption. This is shown in the diagram below.
As you can see when MPB is greater than MSB it causes a negative externality and
with it welfare loss. A solution as the article states is a specific tax on the selling
price thus causing an increase in price and shifting the MSC curve to the left causing
MSB=MPB and furthermore taking care of the welfare loss and externality.
Evaluation
Taxes are designed by governments to help us in the long run they provide us with
goods and services nobody is willing to buy by themselves due to many factors I.E
(street lights) which is also known as public goods. The reason the government
imposes a tax on alcohol is to cover the costs they create, known as externalities.
Changing to a specific tax on alcohol will still cover the externalities caused by
alcohol consumption but will not leave the government with any extra revenue for
any other government subsidies. It will also have minor changes on the price and the
demand for the product. For certain products, the change will be different depending
on their PED which is how sensitive a products demand is to a change in price. The
major change and maybe the change that people want is everyone will pay the same
amount of tax for the amount of alcohol they consume and also that the government
doesn’t take more money than they need. Although having a different tax rate for
different units of alcohol, or a higher tax rate in general for less consumption and
more revenue for the government might not be all that bad. It is better for the
governments to have extra money laying around so that they can subsidise more
important things like hospitals, schools, etc.
Unlike other countries the UK’s alcohol prices are relatively cheap and might be
having a bit of an overreaction to the very small difference of 20p to 25p. the
governments should subsidise the tax revenue they earn from alcohol to educate
people on the effects of alcohol, maybe then the tax won’t seem so outrageous.
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Should there be a specific tax on Alcohol?

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