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Wine Taxes, Production, Aging and Quality

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  • Rachael E. Goodhue
  • Jeffrey LaFrance
  • Leo K. Simon

    ()
    (School of Economic Sciences, Washington State University)

Abstract

We consider the impact of taxes on the quantity and quality produced of goods, such as wine, for which market value accrues with age by a competitive producer. Any pair of taxes that includes a volumetric sales tax and any one of three other types of tax – an ad valorem sales tax, an ad valorem storage tax, or a volumetric storage tax – spans the full range of feasible tax revenues with positive tax rates. For any tax system that reduces quality relative to the firm’s no-tax equilibrium, there is another tax system that increases tax revenues, eliminates the quality distortion, and does not increase the quantity distortion. Many wine industry observers believe that most, if not all, existing tax systems tend to result in the suboptimal provision of quality. Our results suggest that the wide variety of wine tax systems is not prima facie evidence that these systems, or most of them, are inefficient. Provided the system includes a volumetric sales tax it may be efficient, regardless of which of the other instruments, or how many of them, are used. Assertions regarding inefficiency must be evaluated on an empirical case-by-case basis. Our analysis provides a theoretical framework for such research.

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File URL: http://faculty.ses.wsu.edu/WorkingPapers/LaFrance/WP2009-04-GLS-wine-taxes.pdf
File Function: First version, 2009
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Bibliographic Info

Paper provided by School of Economic Sciences, Washington State University in its series Working Papers with number 2009-04.

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Length: 26 pages
Date of creation: Feb 2009
Date of revision:
Handle: RePEc:wsu:wpaper:lafrance-6

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Keywords: aging; Alchian-Allen effect; tax policy; wine;

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References

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  1. Kaempfer, William H & Brastow, Raymond T, 1985. "The Effect of Unit Fees on the Consumption of Quality," Economic Inquiry, Western Economic Association International, vol. 23(2), pages 341-48, April.
  2. Krasker, William S, 1979. "The Rate of Return to Storing Wines," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1363-67, December.
  3. Berger, Nicholas & Anderson, Kym, 1999. "Consumer And Import Taxes In The World Wine Market: Australia In International Perspective," 1999 Conference (43th), January 20-22, 1999, Christchurch, New Zealand 123770, Australian Agricultural and Resource Economics Society.
  4. Borcherding, Thomas E & Silberberg, Eugene, 1978. "Shipping the Good Apples Out: The Alchian and Allen Theorem Reconsidered," Journal of Political Economy, University of Chicago Press, vol. 86(1), pages 131-38, February.
  5. Gould, John P & Segall, Joel, 1969. "The Substitution Effects of Transportation Costs," Journal of Political Economy, University of Chicago Press, vol. 77(1), pages 130-37, Jan./Feb..
  6. Laura Razzolini & William F. Shughart & Robert D. Tollison, 2003. "On the Third Law of Demand," Economic Inquiry, Western Economic Association International, vol. 41(2), pages 292-298, April.
  7. Anderson, Kym, 2001. "Where In The World Is The Wine Industry Going?," 2001 Conference (45th), January 23-25, 2001, Adelaide 125531, Australian Agricultural and Resource Economics Society.
  8. Tsolakis, Dimitris, 1983. "Taxation and Consumption of Wine," Review of Marketing and Agricultural Economics, Australian Agricultural and Resource Economics Society, vol. 51(02), August.
  9. Byron, R P & Ashenfelter, Orley, 1995. "Predicting the Quality of an Unborn Grange," The Economic Record, The Economic Society of Australia, vol. 71(212), pages 40-53, March.
  10. Leffler, Keith B, 1982. "Ambiguous Changes in Product Quality," American Economic Review, American Economic Association, vol. 72(5), pages 956-67, December.
  11. Cowen, Tyler & Tabarrok, Alexander, 1995. "Good Grapes and Bad Lobsters: Applying the Alchian and Allen Theorem," Economic Inquiry, Western Economic Association International, vol. 33(2), pages 253-56, April.
  12. Barzel, Yoram, 1976. "An Alternative Approach to the Analysis of Taxation," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1177-97, December.
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