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Fiscal and Externality Rationales for Alcohol Taxes

  • Parry, Ian W.H.

    ()

    (Resources for the Future)

  • Laxminarayan, Ramanan

    ()

    (Resources for the Future)

  • West, Sarah E.

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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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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