“It’s time to raise the alcohol tax,” declared Vox author German Lopez back in December.
Now let me state upfront that I am not confident I know what the correct tax rate on alcohol should be. Lopez may well be right about their being a rational case on economic grounds for an increase based on high‐quality, robust analysis. But his article does not make a reasoned case satisfactorily, nor does it link to such analysis.
In fact, it came to my attention as I was finalizing my new paper “How Market Failure Arguments Lead to Misguided Policy” (released today). And I’m convinced his piece is a classic of the genre. This article aims to highlight some of the key objections I have to his approach, which is increasingly common in public debate.
The traditional economic case for alcohol taxation
Libertarian theory aside, the classic case for taxing alcohol will be familiar to those with basic economic knowledge. Alcohol consumption is believed to impose, on net, external costs on people other than drinkers themselves.
When deciding whether to drink, individuals are thought to only consider the balance of private costs (the money it costs to drink, the hangover, the risk of disease or accidents for them etc) and the private benefits of consumption (the confidence, the enjoyment of the taste, the benefits to them of socializing etc).
But clearly, alcohol consumption can have external effects. The costs of alcohol‐related crime and driving under the influence are borne by others. There may be net external costs relating to health care, too, given alcohol‐related diseases and incidents could necessitate higher taxpayer subsidies or insurance premiums (though, applying such logic consistently, one would have to net off any “savings” that alcohol consumption might deliver in terms of lower Social Security and Medicare payments from reduced longevity).
The economic case for a tax then is this: if we observe net external costs associated with alcohol consumption, then allowing a free market would lead to higher levels of consumption than optimal. If a tax can be imposed that equates roughly to the marginal external costs of consumption, then drinkers are faced with a price reflective of the true costs of their actions.
Due to the “Law of Demand,” the amount of alcohol consumption will fall to the level at which marginal social costs equate to marginal benefits as this tax is imposed. Some of the negative external costs will occur less often, as will some of the private costs. Society as a whole will be better off because the tax means prices now reflect the true cost to society of the product’s consumption.
In order to make the case for a hike in alcohol taxes then, Lopez simply needed to present clear evidence that current tax rates on alcohol are too low to account fully for the external costs of consumption we see. His line of reasoning does not make this case.