Tax Design in the Alcohol Market

73 Pages Posted: 12 Dec 2017

See all articles by Rachel Griffith

Rachel Griffith

Institute for Fiscal Studies (IFS); University of Manchester; Centre for Economic Policy Research (CEPR)

Martin O'Connell

Institute for Fiscal Studies (IFS)

Kate Smith

Institute for Fiscal Studies (IFS); University College London

Date Written: February 2017

Abstract

We study optimal corrective taxation in the alcohol market. Consumption generates negative externalities that are non-linear in the total amount of alcohol consumed. If tastes for products are heterogeneous and correlated with marginal externalities, then varying tax rates on different products can lead to welfare gains. We study this problem in an optimal tax framework and empirically for the UK alcohol market. Welfare gains from optimally varying rates are higher the more concentrated externalities are amongst heavy drinkers. A sufficient statistics approach is informative about the direction of reform, but not about optimal rates when externalities are highly concentrated.

Keywords: Alcohol, corrective taxes, externality

JEL Classification: D12, D62, H21, H23

Suggested Citation

Griffith, Rachel and O'Connell, Martin and Smith, Kate, Tax Design in the Alcohol Market (February 2017). CEPR Discussion Paper No. DP11820. Available at SSRN: https://ssrn.com/abstract=3086137

Rachel Griffith (Contact Author)

Institute for Fiscal Studies (IFS) ( email )

7 Ridgmount Street
London WC1E 7AE
United Kingdom
+44 20 7291 4800 (Phone)
+44 20 7323 4780 (Fax)

University of Manchester ( email )

Arthur Lewis Building
Oxford Road
Manchester, M13 9PL
United Kingdom

HOME PAGE: http://www.ifs.org.uk/people/profile?id=37

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Martin O'Connell

Institute for Fiscal Studies (IFS) ( email )

7 Ridgmount Street
London, WC1E 7AE
United Kingdom

Kate Smith

Institute for Fiscal Studies (IFS) ( email )

7 Ridgmount Street
London, WC1E 7AE
United Kingdom

University College London ( email )

Gower Street
London, WC1E 6BT
United Kingdom

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