The taxes that keep on giving

Measuring the Effects of the 1991 Federal Alcohol Tax Increase, Philip J. Cook and Christine Piette Durrance

“[A tax induced increase of 6 percent in alcohol prices] resulted in a reduction of 4.7 percent in injury deaths nationwide.”

ecause consumers reduce alcohol consumption in response to price increases, rising excise taxes on alcohol are associated with reduced levels of alcohol abuse and the related consequences for public health and safety. In The Virtuous Tax: Lifesaving and Crime-Prevention Effects of the 1991 Federal Alcohol-Tax Increase (NBER Working Paper No. 17709), authors Philip Cook and Christine Piette Durrance estimate the effects of a change in the federal tax on alcohol that took place on January 1, 1991. The federal government doubled the tax on beer and raised tax rates on wine and spirits as well, and alcohol prices jumped an average of 6 percent (adjusting for overall inflation) nationwide.

The authors find that this price increase resulted in a reduction of 4.7 percent in injury deaths nationwide during the first year. Both violent and property crime also declined after this increase in the federal tax on alcohol. Violent crime — especially robbery, aggravated assault, and rape — was apparently more sensitive to the level of alcohol consumption within a state than property crime. Among the category of property crimes, burglary and motor vehicle theft rates were most sensitive to a state’s per capita alcohol consumption after the tax increase. The authors’ results demonstrate that the alcohol-price elasticity for several health and safety outcomes is closely related to average alcohol consumption.

8 thoughts on “The taxes that keep on giving

  1. This could solve all our problems. We should put a really high tax on hard drugs, on violent crimes, on bikie gang membership.

  2. Strangely enough Brad, your sarcastic rejoinder isn’t far from the truth. As Don Weatherburn of the Bureau of Crime Statistics and Research explains here:

    About Christmas 2000 Australia experienced an unprecedented reduction in the supply of heroin. The price of heroin rose from $218 a gram to $381. The purity of heroin fell from 60 per cent to 20 per cent.

    To that point many people thought that if heroin became more expensive, dealers’ profits would increase and heroin users would commit even more crime to fund their purchases of heroin. What happened was that heroin use and crimes such as theft and robbery fell like a stone.

  3. How long before the benefit of the tax increase runs out? I’ll bet that a 6% increase does not result in a permanent decrease in consumption. If that’s correct then the title of the post is wrong.

  4. ‘If’ being the operative.word. What makes you think that people don’t respond to incentives? Or is it just that praising any tax annoys you? Think of it this way- better a tax on a bad like this than a tax on a good like income or stamp duty.

  5. The problem with increasing these sort of taxes too much is that if you make the products completely unaffordable then people will start smuggling it in or making their own. This is already happening with Tobacco to a large extent.

    If that situation continues for any decent period of time you will have all the same problems as were experienced during outright alcohol prohibition, and as happen now with the outright prohibition of drugs.

    Alcohol and all other drugs should be legalised and taxed, but not taxed so highly that black market alternatives become more attractive than the licit version.

  6. Umm, I didn’t think it was such a hard question. Either the tax increase resulted in a permanent reduction in consumption or it didn’t. My guess is that the level of consumption adjusts back up over time as people become accustomed to the new prices or choose cheaper drinks. If that is correct then the public benefit claim is illusory unless the tax keeps getting raised.

    I’m happy to say that I like elective taxes much better than compulsory ones and I wouldn’t be the first person to notice that sin taxes seem to have more of an impact on the lifestyles and pleasures of the relatively poor. But it’s nice to know it’s for their own good now isn’t it.

  7. ‘Umm, I didn’t think it was such a hard question’
    Didn’t think so either. Nor did I say it was.

    ‘Either the tax increase resulted in a permanent reduction in consumption or it didn’t. My guess is that the level of consumption adjusts back up over time as people become accustomed to the new prices or choose cheaper drinks. If that is correct then the public benefit claim is illusory unless the tax keeps getting raised. ‘

    I’m sure. But all this amounts to saying that ‘if reality conformed to my preferences then the policies I dislike wouldn’t have the effects assumed.’

    ‘But it’s nice to know it’s for their own good now isn’t it.’

    Sure is better than a tax on incomes. If tax on alcohol and cigarettes were paid back by raising the tax free threshold, thereby lowering effective marginal tax rates at the bottom, surely that’s better than not having Pigouvian taxes at all?

    ‘Alcohol and all other drugs should be legalised and taxed, but not taxed so highly that black market alternatives become more attractive than the licit version.’

    Agree. The marginal benefits of Pigouvian taxation should diminish the more tax is collected. Or so I think, anyway. Is there any data on where total effect is maximised?

    btw, is licit a word?

    The intuition in this case seems fairly straightforward. If something is more expensive, less will be bought. You don’t need an economics degree to think this.

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