I just finished reading this 2022 article by Preety Srivastava (RMIT University), Ou Yang (University of Melbourne), and Xueyan Zhao (Monash University), published in the journal Economic Record (open access), which had been sitting in my (virtual) to-be-read pile for far too long. They look at the negative consequences of consuming different alcoholic beverages in Australia, and what that implies for the taxation of different beverage types.
First, Srivastava et al. make a good case for why alcohol is taxed:
The economic argument for alcohol tax is the need for correction of market failures and negative externalities that are associated with alcohol consumption...
...there are many reasons to believe that serious market failure exists in alcohol consumption, and the scale of alcohol abuse we observe in many societies is a testament to this. One example of market failure is the incomplete information regarding the long-term health impact and addictive nature of alcohol consumption in binge drinkers’ private decision-making on consumption. Another example is the use of incorrect discount rates to future harms due to the problem of willpower. More importantly, significant external costs of excessive drinking are borne by society. These include health-care costs of alcohol abuse in publicly funded health systems (such as in Australia), road accidents from drink-driving, and antisocial behaviours when intoxicated, including public nuisances, damage to and stealing of property, and physical and verbal abuse of family members and the wider community.
An excise tax, such as the one that is imposed on alcohol, is therefore an example of a Pigovian tax (named after Arthur Pigou), because one of the purposes of the tax (aside from generating revenue for the government), is to correct for the negative externality (because a tax will reduce the quantity consumed - see here, for example). Now, ideally:
...alcohol tax should be targeted at those excessive consumers whose consumption creates negative external costs, and not at moderate consumers who do not generate such negative costs to others. However, ‘excessive consumption’ is hard to measure, and taxing directly by consumer type is difficult to implement due to potential ethical and privacy issues in obtaining the required information.
So, while the government should be aiming to tax consumers based on the amount of negative externality they generate, that isn't possible because the government can't easily determine who the 'excessive drinkers', who generate the most negative externalities are. So, a general alcohol tax might be applied to all alcoholic beverages. The consequence is that:
A general alcohol tax applied to all drink types will reduce consumption for all consumers, achieving an efficiency gain for consumers with excessive consumption. However, this will also result in efficiency loss for consumers with low to moderate levels of consumption who have already accounted for all negative impacts as private costs in their consumption decision-making. Given that taxing heterogeneous consumers is less feasible, taxing the products that are more likely to be associated with negative external costs or consumed by individuals who are more likely to be involved in risky and abusive behaviours would seem to be a more feasible and efficient approach.
It turns out that is what Australia (and to a lesser extent New Zealand) does. But ineffectively, as we will see. In their paper, Srivastava et al. look at the relationship between consumption of different beverage types and various antisocial behaviours. They use data from the National Drug Strategy Household Survey (NDSHS) between 2004 and 2019, which included over 113,000 people (after excluding abstainers, who don't drink). The survey asks respondents whether they engaged in a range of activities "while under the influence of or affected by alcohol". Srivastava et al. focus on a subset of these behaviours, being those likely to result in negative externalities:
In this study, we focus on the following eight antisocial and unlawful behaviours under the influence of alcohol: (1) driving a motor vehicle; (2) operating a boat; (3) operating hazardous machinery; (4) creating a public disturbance or nuisance; (5) causing damage to property; (6) stealing money, goods or property; (7) verbally abusing someone; (8) physically abusing someone.
They look at drink-driving as one category, and merge all of the others into a separate category that they call "hazardous, disturbing or abusive behaviour" or HDA. One thing that isn't clear from the paper is exactly how the HDA measure is constructed (presumably, it is just whether the respondent engaged in any of the seven behaviours while affected by alcohol). In terms of the different alcoholic beverages, the NDSHS:
...has several questions on individuals’ consumption of various drink types. One of the questions relates to their drinking preferences: ‘What types of alcohol do you usually drink? (Mark all the types of drinks that apply)’. We use this information to construct ten dichotomous variables to indicate respondents’ usual drinking preferences. These binary indicator variables are respectively regular-strength beer (RSB), middle strength beer (MSB), low-strength beer (LSB), cask wine (CW), bottled wine (BW), fortified wine (FW), pre-mixed spirits in a can (PMSC), pre-mixed spirits in a bottle (PMSB), bottled spirits and liqueurs (BS), and other alcohol (Other).
That's a lot of acronyms. And you have to pay attention to them if you're reading the paper, because Srivastava et al. keep using them, and don't usually remind you what they refer to (which was a bit exhausting!).
Now, obviously there are some endogeneity problems in a regression of alcohol harms on beverage consumption, because some of the variables that affect beverage consumption (like demographics - for example, younger drinkers have different drink preferences than older drinkers) also affect alcohol harm. This would bias any estimate of the effect of beverages on harm. Srivastava et al. mitigate this problem by using a Lewbel instrument (see here as well) - the price of beverages should affect beverage consumption, but not directly affect harm, so prices make a good instrument. Essentially, they replace beverage consumption in their main model with estimated beverage consumption based on prices, which won't have the same endogeneity problem. They also run models that don't use the instrument (but which will likely be affected by endogeneity).
Aside from endogeneity, there is one problem with the analysis. Looking at Table 1 in the paper, it is clear that the main dependent variables (drink driving, and HDA) are trended downwards over time - there is lower prevalence of all of these behaviours over time. The alcohol beverage consumption data also appears to be trended over time (from Table 2 in the paper). Srinistava et al. adjust all the prices to 2011/12 dollars, so the most obvious source of trending in the prices (inflation) is removed. However, when running a regression model with trended data in the dependent and explanatory variables, there is a risk of spurious correlation (which Tyler Vigen still does the best job of illustrating). That will clearly be a problem in the models without the Lewbel instruments and it isn't clear to me whether the instrument solves this problem. Srinistava et al. don't mention using time fixed effects or corrections for serial autocorrelation in their models, which would go some way towards mitigating this problem. Anyway, enough pointy-headedness.
Unsurprisingly, Srivastava et al. find that harms differ by beverage type. For drink-driving (DD - yes, another acronym):
RSB, PMSC, MSB, BW, CW and BS are all associated with a higher probability of DD, while LSB, PMSB, FW and Other are related to negative or insignificant effects on the probability of DD. Specifically, in terms of ranking, RSB has the highest positive impact, and is shown to be linked to a 6.5–9.5 percentage points higher probability of DD... Interestingly, CW and BS, the drinks that have drawn much attention in the tax debate, although having a positive impact on DD, both rank behind MSB, with a 1.7–3.3 percentage points higher probability of DD.
And for hazardous, disturbing, or abusive behaviour (HDA):
...RSB, PMSC and CW are ranked as the top three drinks that relate to the highest MEs [marginal effects, yet another acronym] for increasing the probability of HDA behaviours from all three models. CW currently has the lowest tax per LAL across all beverages, which has long been the focus of tax reform discussions...
Finally, LSB, BW and FW are shown to have negative MEs on the probability of HDA across all three models, with LSB having the largest negative effect. A noticeable result is for BW. In contrast to the results for DD, drinking BW is linked to a lower probability of HDA behaviours.
The takeaway from all this analysis is that different beverage types should have different tax rates, with those that are associated with the greatest harm having the highest tax rates. That would mean taxing regular strength beer, pre-mixed spirits in a can, and probably cask wine the most. Unfortunately, that's not at all what Australia does:
When converted to an effective rate per litre of alcohol (LAL), based on the 2007/08 data, the volumetric tax rates vary greatly by beverage... with cask wine paying effectively $3/LAL, bottled wines $14–$33/LAL by prices, beers $19–$31/LAL by alcohol strength, ready-to-drink (RTD) pre-mixed spirits $41–$43/LAL, and straight spirits $66/LAL.
So, while cask wine should be among the beverage types with the highest tax rate, it is taxed the lowest. As Yang and Srinistava note in this article in The Conversation about their paper, the Australian alcohol tax system is "incoherent". It is entirely correct for Australia to charge different tax rates for different beverage types, but those tax rates don't bear appear to bear any relationship to the harms arising from the different beverages. New Zealand's excise system is significantly simpler than Australia's, but again it is unlikely that it bears much resemblance to an optimal set of tax rates across different beverage types. To work efficiently in internalising the negative externalities, Pigovian taxes need to reflect the value of the externalities that they are meant to be correcting. We don't have that now, and some more investigation is needed so that we might hope to in the future.
No comments:
Post a Comment