Alcohol taxes: costs, benefits, and elasticities

Juan non-Volokh points out that taxing alcohol (which I propose here) and discuss further here, would reduce beneficial as well as harmful drinking, thus generating costs as well as benefits. True, though it’s worth noting that most of the benefits accrue to the drinker, while the costs I reckoned accrue to non-drinkers.

Stuart Buck adds that, since problem drinkers are probably more deeply committed to drinking than non-problem drinkers, it’s precisely the non-problem, beneficial drinks that will be prevented by taxation. That seems logical — the parallel assertion about illicit drugs used to be the conventional wisdom — but is probably not the case.

Yes, problem drinkers are strongly committed to drinking. But they also drinking a lot, which means they spend a good chunk of their income on alcohol. Any given price change means more, other things equal, to a heavy drinker than it does to a light drinker. Someone who has three drinks a week won’t much feel a one-dollar increase in the price of a drink, unless he’s poor. Someone who has four drinks a day will feel it, unless he’s rich. So the price-elasticity of demand may actually he greater among problem drinkers than among non-problem drinkers. As the premium-scotch ads used to say, “If the price bothers you, you’re drinking too much.”

The health benefits of drinking, while far from the only benefits (harmless pleasure is a benefit, isn’t it?), are the ones most often cited by opponents of alcohol taxation. All of those benefits occur below the two-drinks-per-day level. But 80% of the alcohol consumed is consumed by people who consume more than two drinks a day (the upper quintile of the drinking distribution among those who drink at all). So when taxation pushes down consumption, which it does, it’s not having its primary effect on the 20% of the drinking that’s done by 80% of the drinkers. (As Buck also points out, some of today’s light drinkers are people on their way to becoming problem drinkers, so taxation even of light drinking is likely to create some benefit in preventing future drinking problems.)

Nonetheless, it’s probably true that most of the drinks prevented by a $1 per drink tax are drinks that, if taken, would have net benefits rather than net costs. But the maximum forgone benefit for each one of those drinks is $1; otherwise the consumer would just pay the tax. The occasional drink that’s the prelude to drunken driving or drunken assault can do thousands, or even tens of thousands, of dollars’ worth of damage.

Is it unfair to tax responsible drinkers to help control the behavior of irresponsible drinkers? Not more unfair than lots of cost transfers we accept without much complaint. My fire insurance premium is higher than it would otherwise be, and my house is littered with ugly and somewhat expensive smoke detectors, because of the people who smoke and drink and sometimes pass out with lit cigarettes in their hands. You may think it’s unfair that I should have to pay for their drinking and smoking, but that’s the way it is. What, then, makes it so horribly unfair if those of us who drink occasionally and responsibly have to face higher taxes that will help reduce problem drinking in all its forms?

From an economic viewpoint, is there reason to believe that the loss of benefit due to the distortion caused by specific excises on alcohol is greater than the loss of benefit due to the distortion caused by whatever tax we could cut (or wouldn’t have to raise) if we raised money from higher booze taxes instead? (California is about to raise tuition at its public universities; the education that will be forgone as a result would have had some benefits, including some external benefits.)

What seems especially strange is the objection to taxation from people not opposed, or at least not vocally opposed, to the current age restriction. Compared to banning drinking altogether by anyone under 21 (or 18, or any other arbitrarily-selected age), taxation puts a smaller burden on liberty and creates a smaller incentive for lawbreaking.

So I remain convinced that the right policy consists of higher taxes, a ban (for a period depending on the offense) on alcohol sales to those convicted of drunken violence, drunken driving, or repeated drunken disorderly conduct, and the abolition of the minimum drinking age.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact: