Calling time on alcohol taxation in Australia

Alcohol is a prime target for taxation. It’s a good source of government revenue; it allows governments to recoup costs for providing services to drinkers (such as accident and emergency care and policing); it provides a mechanism for drinkers to pay for the harm they impose on others as a consequence of their drinking; it helps discourage excessive drinking due to information failure (not all drinkers are aware of all the risks of drinking and some harms are not yet understood) and drinkers’ tendency to discount the long-term harms of alcohol; and reduced consumption of alcohol has known public health benefits. Moreover, a recent Australian review of the evidence clearly showed alcohol taxation is cost-effective.

Given the utility and cost-effectiveness of alcohol taxation, the challenge is to identify an optimally efficient tax system: one that maximises the potential benefits of restrained alcohol consumption for the least amount of cost to those who don’t consume alcohol to excess.

If an economist was asked to design the least efficient alcohol taxation system imaginable, it would more or less approximate the current Australian system. It would be blatantly unfair to lay the blame for this situation at the feet of any particular Commonwealth government. The current system is, ahem, a cocktail of mixed methodologies, ideologies, idiosyncrasies and the remnant battle-lines of long-forgotten policy negotiations.

Essentially, alcohol can be taxed as either a fixed amount per volume of alcohol (a fixed rate of tax per standard drink) or as a proportion of the wholesale price. Australia has both at the same time. Wine is taxed as a proportion of the wholesale price (called the wine equalisation tax), which means the tax applied to cask wine (around 60 cents per litre) is much lower than bottled wine (around $2.60 per litre) because it has a lower wholesale price.

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Source: The Conversation, 14 May 2012