Cross-border shopping and alcohol taxation: some theory and evidence

In this paper we examine the impact of the completion of the Single European Market on the revenue-maximising tax rates on beer, wine and spirits in the UK. We present a simple theoretical framework within which to consider the likely effects on tax revenues of changes in tax rates. We show that the key to the problem is the own price elasticity of demand, and we examine the effect of the Single Market on the domestic price elasticity. Using estimates of the price elasticities for beer, wine and spirits we show that for beer and wine there is presently no revenue-maximisation case for cutting the tax rate. However, we cannot reject the hypothesis that current tax rates on spirits are at their revenue-maximising level. Comparing point elasticity estimates for 1992 and 1993 we also show that while there has been no significant change in the price elasticity of beer and spirits following the completion of the Single European Market, there has been an increase in price elasticity of the demand for wine. We note that the south east of England has seen a stronger increase in price responsiveness than the rest of the UK.