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Externalities, Border Trade and Illegal Production: An Optimal Tax Approach to Alcohol Policy

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  • Aronsson, Thomas

    ()
    (Department of Economics, Umeå University)

  • Sjögren, Tomas

    ()
    (Department of Economics, Umeå University)

Abstract

This paper deals with optimal income and commodity taxation in an economy, where alcohol is an externality-generating consumption good. In our model, alcohol can be bought domestically, imported (via border trade) or produced illegally. Border trade implies an incentive to set the domestic alcohol tax below the marginal social damage of alcohol, and to tax (subsidize) commodities which are complementary with (substitutable for) alcohol. In addition, since leisure and alcohol consumption are generally nonseparable, the income tax will also be used as a corrective instrument. On the other hand, the desire to reduce the illegal production may generally affect the optimal income and commodity taxes in either direction. One possible (and arguably realistic) outcome is, nevertheless, that the desire to avoid the illegal production works to reduce both the alcohol tax and the marginal income tax rate.

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Bibliographic Info

Paper provided by Umeå University, Department of Economics in its series Umeå Economic Studies with number 654.

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Length: 25 pages
Date of creation: 04 Apr 2005
Date of revision:
Handle: RePEc:hhs:umnees:0654

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Postal: Department of Economics, Umeå University, S-901 87 Umeå, Sweden
Phone: 090 - 786 61 42
Fax: 090 - 77 23 02
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Web page: http://www.econ.umu.se/
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Keywords: taxation; external effects; alcohol; border trade.;

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  1. Peter A. Diamond, 1973. "Consumption Externalities and Imperfect Corrective Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(2), pages 526-538, Autumn.
  2. Aronsson, Thomas & Blomquist, Sören, 2000. "Optimal Taxation, Global Externalities and Labor Mobility," Working Paper Series 2000:15, Uppsala University, Department of Economics.
  3. Helmuth Cremer & Firouz Gahvari & Norbert Ladoux, 2001. "Second-Best Pollution Taxes and the Structure of Preferences," Southern Economic Journal, Southern Economic Association, vol. 68(2), pages 258-280, October.
  4. Ian Crawford & Sarah Tanner, 1995. "Bringing it all back home: alcohol taxation and cross-border shopping," Fiscal Studies, Institute for Fiscal Studies, vol. 16(2), pages 94-114, May.
  5. Cremer, Helmuth & Gahvari, Firouz, 2001. "Second-best taxation of emissions and polluting goods," Journal of Public Economics, Elsevier, vol. 80(2), pages 169-197, May.
  6. Parry, Ian W H, 2003. "On the Costs of Excise Taxes and Income Taxes in the UK," International Tax and Public Finance, Springer, vol. 10(3), pages 281-304, May.
  7. Clemens Fuest & Bernd Huber, 1997. "Wage bargaining, labor-tax progression, and welfare," Journal of Economics, Springer, vol. 66(2), pages 127-150, June.
  8. Pogue, Thomas F & Sgontz, Larry G, 1989. "Taxing to Control Social Costs: The Case of Alcohol," American Economic Review, American Economic Association, vol. 79(1), pages 235-43, March.
  9. Aronsson, Thomas & Sjögren, Tomas, 2002. "Is the Optimal Labor Income Tax Progressive in a Unionized Economy?," UmeÃ¥ Economic Studies 587, Umeå University, Department of Economics.
  10. Christiansen, Vidar, 1984. "Which commodity taxes should supplement the income tax?," Journal of Public Economics, Elsevier, vol. 24(2), pages 195-220, July.
  11. Larry G. Sgontz, 1993. "Optimal Taxation: the Mix of Alcohol and Other Taxes," Public Finance Review, , vol. 21(3), pages 260-275, July.
  12. Ian Crawford & Sarah Tanner, 1999. "Alcohol taxes, tax revenues and the Single European Market," Fiscal Studies, Institute for Fiscal Studies, vol. 20(3), pages 287-304, September.
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