|Date:||15 June 2017|
|Authors:||Rachel Griffith , Martin O'Connell and Kate Smith|
The government has recently consulted on the structure of alcohol taxes. This consultation focuses on two issues: (i) the introduction of a new still cider and perry band that would increase the tax on products below 7.5% ABV, and (ii) the introduction of a new still wine band that would reduce the tax on products between 5.5% and 8.5% ABV.
In this Observation we summarise our main points from our response to the consultation (which is reproduced in full at the end of this piece).
The main rationale for subjecting alcohol to additional taxes above and beyond VAT is that there are social costs of drinking that are not taken into account by the drinker themselves. These costs include the public costs of treating alcohol-related diseases and dealing with alcohol fuelled crime. The aim of taxation should be to raise the price paid by the drinkers who generate these social costs by an amount equal to the (marginal) social cost of drinking an extra drink.
Ideally, taxes would be levied per unit of pure alcohol (ethanol), as it is the alcohol that creates social costs. However, restrictions imposed by the European Union mean that cider and wine must be taxed per litre of product. This means that for a given tax rate per litre of product, higher strength products (those that contain more pure alcohol per litre of product) face a lower per unit of alcohol tax rate. This restriction is one motivation for introducing additional tax bands for mid-strength cider and low-strength wine.
In light of this, our view on the proposed modest reforms are summarised as follows:
Overall this represents a missed opportunity for a more comprehensive review of how alcohol is taxed in the UK. The annex to this Observation contains our responses to selected questions in the consultation (shown in bold).