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Fiscal and Externality Rationales for Alcohol Taxes

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  • Parry, Ian W.H.

    ()
    (Resources for the Future)

  • Laxminarayan, Ramanan

    ()
    (Resources for the Future)

  • West, Sarah E.

Abstract

This paper develops and implements an analytical framework for estimating the optimal levels and welfare effects of alcohol taxes and drunk-driver penalties, accounting for externalities and how policies interact with the broader fiscal system. We find that the fiscal component of the optimal alcohol tax exceeds the externality-correcting component under many parameter scenarios and assumptions about revenue recycling; overall, the optimal tax is anything from three to more than ten times the current tax. For more incremental reforms, however, welfare gains from stiffer drunk-driver fines and non-pecuniary penalties are larger, even though they involve implementation costs, possible first-order deadweight losses, and fiscal considerations play a minor role. In contrast to current practice, fiscal considerations warrant relatively heavier taxation of beer and relatively lighter taxation of spirits.

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Bibliographic Info

Paper provided by Resources For the Future in its series Discussion Papers with number dp-06-51.

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Date of creation: 22 Nov 2006
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Handle: RePEc:rff:dpaper:dp-06-51

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Keywords: alcohol tax; drunk-driver penalty; fiscal effects; external costs; welfare effects;

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Cited by:
  1. Bossi, Luca & Calcott, Paul & Petkov, Vladimir, 2011. "Optimal Tax Rules for Addictive Consumption," Working Paper Series 1673, Victoria University of Wellington, School of Economics and Finance.
  2. Nordblom, Katarina, 2006. "The Complex Attitudes to Alcohol Taxation," Working Papers in Economics 207, University of Gothenburg, Department of Economics.
  3. West, Sara E. & Parry, Ian W.H., 2009. "Alcohol-Leisure Complementarity: Empirical Estimates and Implications for Tax Policy," National Tax Journal, National Tax Association, vol. 62(4), pages 611-33, December .
  4. Luca Bossi & Pedro Gomis-Porqueras & David L. Kelly, 2007. "Optimal Second Best Taxation of Addictive Goods," Working Papers 0708, University of Miami, Department of Economics.

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