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Tax design in the alcohol market

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  • Rachel Griffith

    () (Institute for Fiscal Studies and IFS and Manchester)

  • Martin O'Connell

    () (Institute for Fiscal Studies and Institute for Fiscal Studies)

  • Kate Smith

    () (Institute for Fiscal Studies and Institute for Fiscal Studies)

Abstract

We study optimal corrective taxation in the alcohol market. Consumption generates negative externalities that are non-linear in the total amount of alcohol consumed. If tastes for products are heterogeneous and correlated with marginal externalities, then varying tax rates on different products can lead to welfare gains. We study this problem in an optimal tax framework and empirically for the UK alcohol market. Welfare gains from optimally varying rates are higher the more concentrated externalities are amongst heavy drinkers. A sufficient statistics approach is informative about the direction of reform, but not about optimal rates when externalities are highly concentrated. This is an updated version of previous working paper see here.

Suggested Citation

  • Rachel Griffith & Martin O'Connell & Kate Smith, 2017. "Tax design in the alcohol market," IFS Working Papers W17/28, Institute for Fiscal Studies.
  • Handle: RePEc:ifs:ifsewp:17/28
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    Keywords

    externality; corrective taxes; alcohol;

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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