Thursday 4 November 2021

The UK's alcohol tax shake up

Rishi Sunak announced plans to shake up the alcohol duty system in his budget last week. I've written for CapX about what he wants to do, where it falls short and what it means for you, the hard-drinking British worker.

It was a pleasant surprise to be quoted by the Chancellor when he presented his Budget last week. In 2017, I wrote a short paper for the IEA titled A Rational Approach to Alcohol Taxation in which I said that the way we tax booze in Britain ‘defies common sense’. Rishi Sunak quoted these words, along with the view of the Institute of Fiscal Studies that the alcohol tax system is ‘a mess’.

And so it is. My argument in 2017 was that if we must tax alcohol, we should tax units of alcohol rather than taxing arbitrary volumes of fluid. I wrote:

‘A unit of alcohol is taxed at 27.7p if it happens to be in a glass of whisky but at just 7.8p if it is in a pint of cider. If the cider is strong, the tax is less than 7.8p, but if it is strong and fizzy the tax is 33.6p. Similarly, the tax on a unit of alcohol in a glass of wine amounts to 19.8p unless the wine is sparkling, in which case it is 25.4p.’

These peculiarities have arisen over several centuries thanks to special pleading from various interest groups and, in more recent decades, EU legislation. The alternative I suggested was a straightforward Pigouvian tax. You work out the cost of alcohol’s negative externalities (i.e. the cost imposed on people other than the drinker) and tax each unit of alcohol at a rate that adds up to that cost. At current rates of consumption, I estimated this to be 9p per unit, significantly less than the average rate of tax on alcohol but more than the lowest rate.

The Government intends to move things in this direction. The tax system will be simplified. Alcohol will effectively be taxed by the unit, although the rate will vary between beer, wine, cider and spirits. The tax rate will be the same across each category except for very strong or very weak versions of the drink. The rate will also be slightly lower in pubs.

Read on...

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