An obvious response to a tax is to carry out fewer of the transactions that the tax applies to. So other things equal, in a high-tax economy, there will be more do-it-yourself provision, less internal trade and a less sophisticated division of labour than in a low-tax economy. When taxes are imposed in a selective rather than uniform fashion, there will be additional efficiency losses, as people will try to shift away from the higher-taxed towards the lower-taxed activities. Not to mention the time and effort dedicated to working out ways around taxes.
But enough abstraction. Tax distortions are all around us, and if you have recently been to a pub and found your pint a bit flabby, chances are that you have experienced one of them. The Economist reckons that the current trend towards beers with lower alcohol levels is driven by tax considerations.
It is easy to see why. Alcohol duty rates for beer are proportional to alcohol content, with a rate of about 11p per percentage point of alcohol in a standard pint. That might explain anomalies like ‘Becks Vier’, which is hyped heavily in the UK, but unknown in the brewery’s home market. It might also explain the presence of beers with an alcohol level of exactly 2.8%: That is the threshold above which the conventional beer duty applies, with a reduced rate for beers not exceeding this level. As soon as the threshold is crossed, the tax level doubles.
Beer duties are just the tip of the iceberg; the taxman’s influence on what goes on inside the pub extends well beyond that. The alcohol duty system is a highly selective, multiple-rate system which treats different sources of alcohol very differently (even still cider and sparkling cider have separate rates) and which introduces all sorts of weird jumps at arbitrary thresholds. The tax treatment of wine is especially harsh, with 60p per glass going straight to the exchequer. Cider comes off relatively lightly when its alcohol content is no higher than 5.5%, but is heavily penalised when stronger than that. Thus, the tax system exerts a heavy influence not just on how much, but also on what people drink. And that should also be considered part of the cost of excise taxes.
A more streamlined system would obviously be less bad, but in fact, alcohol duties should not exist at all. Alcoholic beverages are taxed with the standard VAT rate, and that is more than enough already. The conventional argument about externalities in alcohol consumption – the cost of treating intoxications, and the increase in the incidence of brawls – is easily addressed: Send the full bill to everybody who is hospitalised with alcohol intoxication. Raise fines and speed up trials for troublemakers.