Friday 6 September 2019

The Social Market Foundation's alcohol tax report

In a report that was "kindly supported" by the Institute of Alcohol Studies (neé UK Temperance Alliance), the Social Market Foundation calls for a reform of Britain's alcohol duty system. They rightly point out that the system is incoherent and irrational. I said likewise in 2017 when I proposed taxing all units of alcohol at the same rate to make the system genuinely Pigouvian. This implied a flat rate of 9p per unit and a large decline in the amount raked in by the government.

The SMF are broadly right about what is wrong.

While a relatively weak 6% ABV bottle of wine faces duty of 50 pence per unit of alcohol, as of the time of writing a 6% ABV cider faces duty of just 7 pence per unit of alcohol.

This is because the UK has traditionally imported its wine while producing its own cider, but that is not a valid reason.

Given that alcohol consumption generates externalities – impacting government, families and other individuals as well as the direct consumers of alcohol – the overall rate of alcohol taxation should be reflective of the size of these externalities. 

It would be easy to misread this as saying that the impact on 'direct consumers of alcohol' is an externality. Obviously it isn't, but assuming that's not what they mean, they are right. 

Brexit could open up possibilities to rationalise alcohol taxation in the UK.

Very true.

Given the political nature of duty changes, the UK has been lumbered with a system of alcohol taxation ill-suited for meeting key objectives of government: raising tax revenue, protecting jobs or improving public health and other social outcomes. Rather than examining the evidence base and reflecting on the alcohol duty regime as a whole, the system has been tweaked according to political whims over time.

Also very true.

Arguments often used to justify duty freezes and favourable treatment for certain beverages are deeply flawed. For example, jobs-based arguments used to justify cider and spirits duty freezes ignore the fact that cider accounts for a very small number of jobs in the economy

Indeed. Economists are generally dismissive of jobs-based arguments. A reduction of employment in one area tends to lead to a growth in another.

But the SMF is also wrong about quite a lot too...

Jobs-based arguments also ignore work lost through excessive alcohol consumption. Analysis by Public Health England found that, in 2015, there were 167,000 working years of life lost due to alcohol consumption – 16% of all working years lost in that year.

That's not a jobs argument. People dying doesn't cause unemployment, just as people being born doesn't reduce unemployment.

Arguments related to the regressive nature of excise duties are also flawed. Firstly, alcohol taxation does not appear to be particularly regressive, given relatively high rates of non-drinking among lower income households.

Only if you look at people as groups. If you look at individual drinkers, it is clearly regressive.

Secondly, regressivity alone is not a strong argument against alcohol duty.

That's a matter of opinion.

Studies suggest that the total costs of alcohol to UK society could stand at between 1.3% and 2.5% of GDP.

This is a statistic that first appeared in Public Health England's woeful report on alcohol which quickly turned into the claim that alcohol misuse costs society 'up to £52bn a year, far more than previously thought'. This is based on looking at a range of international estimates which do indeed range from 1.3% to 2.5% and picking the biggest one.

But guess where the cost is estimated at 1.3%. That's right: the UK. So it's not necessary to use a range of estimates from around the world to estimate the UK figure when one of those figures is the UK itself, is it? This is a small but typical example of the 'public health' lobby lying with statistics.

Moreover, that estimate of 1.3% (£21 billion) is nearly 20 years old and is mostly made up of costs that are not external.

Hazardous and harmful drinkers account for a staggering 78% of alcohol consumed in England. 

This is based on the discredited lie that it is hazardous to drink more than 14 units a week.

There is also growing evidence suggesting that even moderate rates of alcohol consumption are associated with higher risks of cancer.

That evidence is very weak.

The SMF have five main policy recommendations:

1. Introducing a duty strength escalator, to focus alcohol duty on the higher strength products disproportionately consumed by heavy drinkers, and create stronger incentives to produce lower strength products.

If you have a flat tax on each unit of alcohol, stronger drinks are taxed more almost by definition. That should be sufficient. If, however, it could be shown that certain drinks create greater externalities, a case could be made for the kind of system proposed by the SMF. There is some evidence for this, but it is far from clear that taxing those drinks more would not simply displace consumption, with the effect that another form of alcohol becomes associated with the same externalities.

2. Levelling the playing field across same-strength products. Products of the same strength should face the same rate of duty and duty should be a function of the pure alcohol content of drinks, rather than the volume of the final product. This would help simplify the alcohol duty system.

.. We recommend taxing alcohol on a consistent basis, according to the pure alcohol content of the beverage.

So do I.

3. Allowing pubs to claim back a proportion of alcohol duty through a new “Pub Relief”. This would focus alcohol duty on the off-trade, which is particularly reliant on sales to hazardous and harmful drinkers.

.. We assume that our proposed “Pub Duty Relief” rate is set at 50% - meaning that duty rates in the on-trade are half as much, per unit of alcohol, than on the off-trade.

No one loves pubs more than me, but this sounds like the kind of tweaking of the system according to political whims that the SMF complain about at the start of their report.

To be fair, they come up with a superficially plausible justification for what seems like rent-seeking...

...heavier drinkers are more likely to consume alcohol on the off-trade. Therefore, in line with our proposed framework of focusing alcohol duty where harms are most generated, we suggest explicitly favouring on-trade consumption of alcohol in the tax system.

This could be right but there are reasons to doubt it. Whilst the majority of health harms are linked to off-trade alcohol (most alcohol is sold on the off-trade, after all), those harms are to the drinker and are thus not externalities (for the most part, at least). It is less clear that the external harms are disproportionately associated with the off-trade. Most alcohol-related violence takes place in and around the on-trade. Drink driving is also, I suspect, more closely linked to the on-trade than the off-trade.

In any case, if this is an attempt to 'support the pub sector', as the BBC claims, the SMF's own figures show that it won't work:

The impact of switching to the duty regime described above would be to cut overall alcohol consumption by 5.4%, compared to the current regime. This would come from a 1.9% decline in on-trade alcohol consumption and a 6.8% decline in off-trade consumption.

On-trade consumption of alcohol falls, in the model, despite declines in on-trade prices. This reflects cross elasticities of demand for alcohol products. Increased prices in the off-trade can reduce demand in the on-trade as well.

I have explained one of the reasons for this here.

4. Explicitly linking alcohol duty to the social costs of alcohol, rather than treating it as a cash cow. At the very least, alcohol duty should cover the health, crime and welfare costs to government and wider society (the “externalities” associated with alcohol consumption). 

It should cover the net externalities, yes.

At this point, regrettably, the influence of the 'Institute of Alcohol Studies' becomes apparent...

Paternalistic arguments, which consider the ability of individuals to make “bad” and regrettable lifestyle choices (such as those that undermine their job prospects), could justify a higher tax take.

Coercive paternalism has no place in a free society and there is no point producing a lengthy report about alcohol taxation if you're going to throw out your economic analysis and resort to saying 'but muh paternalism'.

.. We do not take a strong position on the degree of paternalism that should be embedded in the alcohol duty system in this report – ultimately, we believe this is a matter for politicians and the electorate. 

You work for a think tank, for God's sake. Get off the fence!

Our key argument is that tax take from alcohol duty should be focused on alcohol-related costs, whether that be the externalities of alcohol consumption or a broader measure covering private costs drinkers.

Drinkers already pay the private costs. If you pretend those costs are externalities and add them to the tax, they end up paying twice. There is no ethical or economic justification for that.

5. Regularising the uprating of alcohol duty, with inflation or earnings uprating being the “norm”. This would help depoliticise the setting of alcohol duty.

I'm comfortable with automatically increasing the tax by the rate of inflation once we've reformed the system. In practice, that means significantly reducing the rate of tax charged on most, but not all, drinks.

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