The Impact of a Proposal to Align All Excise Rates for Alcohol - Report Example

REPORT ON THE IMPACT OF A PROPOSAL TO ALIGN ALL EXCISE RATES FOR ALCOHOL STUDENT’S NAME: COURSE: TUTOR’S NAME: DATE: BACKGROUND OF AUSTRALIA’S EXCISE RATES ON ALCOHOL Alcohol taxation is often cited as one of the policy issues that can deliver effective solutions to problems related with excessive alcohol consumption in Australia and elsewhere in the world. Specifically, health experts argue that the only way that the Australian government can discourage people from engaging in harmful alcohol drinking practices is by harmonising the excise tax regime applicable to alcohol in such a manner that all alcoholic drinks regardless of their type would have excise tax rates pegged on their respective alcohol content1. This is by no means a consensus among different commentators; some have opposing views and argue that all types of liquor, regardless of their alcohol content can be abused by problematic drinkers. Consequently, such over-indulgence exposes them to health-related consequences, whose burden unfortunately is not only borne by the alcohol consumers themselves, but by their families and the society at large through healthcare costs. Traditionally, excise taxes on alcohol were used as a revenue collection tool2. As the rate of alcohol consumption increased and the government realised that citizens were wasting away through excessive consumption tendencies, excise taxation became a way of encouraging people to change behaviour. As Webb3 notes, most governments (including Australia) have labelled excise tax on alcohol and other items such as tobacco as ‘sin taxes’, since the revenue collected from these products is ostensibly used to correct market externalities that occur directly from their consumption. In Australia, any proposed tax must meet three key criteria: first, it must meet the threshold of economic efficiency. This means that the tax needs to affect incentives in a manner that may change the economic behaviour shown by consumers. Second, the tax must meet equity considerations. This means that the population needs to perceive the tax as fair and equitable amongst consumers in different social or income categories. Third, the tax must be practically enforceable, implying that the government should ensure that the costs of enforcing and compliance are within a sustainable range4. PUTTING THE TAXATION ISSUE INTO PERSPECTIVE Worldwide, alcohol is categorised as either ethyl alcohol or methyl alcohol. The former is found in alcoholic beverages, while the latter is used for industrial purposes since it is lethal and hence non-consumable. Alcohol beverages are further classified as fermented liquor or distilled liquor. As the name suggests, fermented liquor is obtained through fermentation. Generally, un-distilled spirits that contain less than 15 degrees ethanol concentration are classified in the fermented liquor category5. Examples of such liquor include champagne, wine and beer. Distilled liquor on the other hand is a classification of spirits obtained through the distillation process. However, un-distilled spirits whose ethanol concentration exceeds 15 degrees by volume are also considered as part of this category6. Examples of distilled liquor include whiskey, rum, gin and vodka. Going by the high alcohol content, one can easily understand the reasoning why Australia (under this report-s context) zero-rates any alcohol that is used for industrial end use, while applying a $10 per litre tax on fermented liquors, and a further $50 per litre excise tax on distilled liquor. The modalities of such a tax system are probably pegged on the alcohol content of the two distinct liquors specifically given that distilled liquors have higher alcohol contents than the fermented liquor. The immunity granted to industrial alcohol is probably pegged on the belief that such alcohol is exclusively used for industrial purposes and hence it does not qualify to be categorised as a ‘sin tax’. But does the industrial alcohol always end up in industries as envisaged by the government? Well, in a report by the World Health organisation7, it is revealed alcohol intended for medical or industrial use was in different parts of the world used in the production of informal alcoholic beverages. The consumption of diluted ethyl alcohol is documented as being prevalent among human beings especially since it has mind-altering and intoxicating effects. People who are daring enough to consume it usually dilute it with other beverages. The World Health Organisation further notes that most such alcohol is outside the formal distribution and sales channels that are controlled by governments. Seeing that Australia is not immune to such practices, the government also needs to consider applying tax on industrial alcohol as a means of raising its cost and hence preventing its diversion into cheap beverage brewing. A rebate to industrial users will ensure that they do not incur additional costs as a result of the policy. The proposal to raise excise tax rates from $10 per litre of fermented liquor could also end up lowering the consumption habits of Australian consumers given that considering that the WHO report identifies beer as the ‘most consumed beverage in terms of litres of pure alcohol’ in the country8. Lowering the excise rate to $25 per litre from $50 per litre would not have a major effect on the consumption habits of distilled liquor in Australia especially considering that Australians have already been found to have a liking for fermented liquor such as beer. There however exists the possibility that problematic alcohol consumers would find it easier to drink the high-alcohol distilled liquor, which would be more affordable considering the flat-rate taxation, which would essentially reduce the taxes by $25 per litre. This possibility aside however, the proposed changes would lead to a volumetric excise rate system, which according to Webb9, would simplify ‘administration and compliance’. Additionally, a single excise tax rate would do away with the need to differentiate the alcohol strength in different alcoholic products thus making its enforceability and administration much easier. Considering that this report targets reducing excessive consumption of low-price beers and contraband distilled liquors, it is worth noting that lowering excise rates on distilled liquor will most likely enhance its affordability among low-income earners who for varied reasons such as addiction or personal preference cannot quit consuming alcohol. This would in turn enhance equity among consumers, and would hence allow low-income earners to access relatively safer liquor, which has undergone standardisation and health checks in order to determine its safety. Reducing the excessive alcohol consumption should be an important policy agenda for the Australian government because as WHO observe’, ‘alcohol has been identified as a component cause for over 200’ disease codes identified by the International Classification of Diseases (ICD). Some of major health disorders directly or indirectly linked to excessive consumption of alcohol include: neuropsychiatric disorders such as epilepsy, gastrointestinal diseases such as pancreatitis and cirrhosis, cancer categories, intentional self-inflicted injuries, unintentional injuries such as road accidents, cardiovascular diseases such as ischaemic stroke and ischaemic heart disease, diabetes mellitus and foetal alcohol syndrome10. Despite the negative effects of alcohol, it is worth noting that its consumption is not without some benefits to the society. As Richupan11 notes for example, many societies have assimilated alcohol consumption into their collective national cultures. Consequently, countries benefit economically from such consumption since alcohol consumption has to be supported through activities such as grape farming, barley farming, and the establishment of breweries and wineries. Such activities in turn contribute to the economic well-being of the country. The taxes imposed on alcoholic beverages also present an income-generating avenue for governments, and such revenues are used in government expenditure and in correcting the negative externalities linked to alcohol consumption. The proof contained in the above section backs this report’s proposal that excise tax needs to be harmonised across all alcohol categories to $25 per litre, and a rebate of the same amount offered to industries who prove that their alcohol was indeed used for industrial purposes. Such tough measures will however contain advantages and disadvantages that the government needs to consider. Advantages of a single excise tax rate i. Simplifying management and compliance: Alcohol taxation in Australia is not only complex, but also distorted. Presently, taxation policy targeting alcohol makes the distinction among imports and domestic products; low-alcohol and high-alcohol products; different alcohol types; and it also promotes low-alcohol beer. Additionally, some alcohol producers are entitled to tax concessions and such complexities warrant some form of harmonization. Applying a standard excise tax on all types of alcohol would therefore make the entire process of managing and ensuring compliance simpler. Additionally, the proposed policy will rebuff sectors favoured by prevailing policies a chance to engage in rent-seeking tendencies. ii. Dispense the need to differentiate the alcohol content in different alcoholic brands. iii. Enhance equity among consumers of different social and income classes: the principle of horizontal equity suggest. that taxes should be commensurate with income levels. Hence, a low-income earner should pay lower taxes compared to a high income earner. To enhance equity, government usually impose progressive tax on individuals, and this means that the more a person earns the more taxes they remit to the government. In alcohol matters however, taxation takes a regressive approach since as Webb12 notes, low income earners seem to bear the brunt of taxation since high income earners are insensitive to any increases in tax. In Australia for example, heavy drinkers, indigenous groups and young people who are in low-income groups were found to bear the most impact of an increase in the prices of alcohol. Alcohol consumers from high-income groups on the other hand were found to have a liking for the expensive alcohol brands, and while price increases may marginally reduce their consumption habits, they had the alternative of switching to the less-costly alternatives13. Considering that excessive consumption has a higher concentration among low-income groups, the single rate would succeed in increasing the relative price of fermented liquors thus curbing abuse among low-income earners. iv. The proposed taxation recognises the real costs associated with the cost of treating or managing health problems brought about by excessive consumption of alcohol. 2008-2009 estimates suggested that the total amount of revenues generated from the excise tax imposed on alcohol was $7 billion annually14. The revenues pale in comparison to the $15 billion that Collins and Lapsley estimated that Australia spends annually in managing the harmful consequences of alcohol consumption in the country15. Disadvantages of a single excise tax rate i. A single excise tax rate is likely to encourage the consumption of alcohol beverages whose alcohol content is high. If this was to happen, such a tax rate would therefore pay a blind eye to the negative externalities that high-alcohol content beverages have on the larger society. Ideally, imposing a $25 per litre excise tax on all alcoholic beverages would result in a situation whereby the price of fermented liquor would rise, while the price of distilled liquor would decline considerably. The single largest threat to such a precedent is that more people would be able to afford distilled liquor, which according to Webb contains high amounts of alcohol16. Notably it is easier to drink excessively when consuming high-alcohol beverages and this means that the single excise tax rate would probably be contrary to the goals of reducing excessive amounts of alcohol. ii. By lowering the excise rate on distilled liquor, the policy would deny the government a revenue-raising opportunity targeting the high income earners. The rationale behind this argument is that people who indulge in distilled liquor do so because they have the resources needed to feed their indulgence. Hence, reducing the tax rate by a $25 per litre margin would be tantamount to denying the government similar revenue per litre. iii. Non-problem alcohol consumers (i.e. those who do not over indulge) would have to sustain some losses either through drinking less alcohol or paying higher prices. This is however compensated by the fact that they would benefit from reduced external costs such as reduced exposure to violence from excessive drinkers. ENFORCEABILITY, MANAGEMENT AND POLICY EFFECTS For the proposed tax policy to be implemented, the Wine Equalisation Tax (WET), which is currently part of the Australian alcohol taxation policy, would have to be abolished. According to Webb17, ‘Australia seems to be the only OECD country with two value-based taxes on alcoholic beverages’ (i.e. the WET and the Good and Services Tax (GST)). Scrapping WET and enacting the proposed the $25 excise tax rate across all alcohol categories would simplify the management of the tax system on alcohol by facilitating the removal of anomalies such as the varying rate-per-litre of alcohol currently in place. Enforceability of any tax however depends on perceptions that the taxpayers have regarding its fairness and equity. According to van den Noord and Heady18, ‘a tax that is generally seen as unfair or arbitrary in its incidence can generate reluctance among taxpayers to comply’. Judging the $25 per litre standard excise rate based on such views, one would argue that perhaps consumers of fermented liquor would find the tax proposed tax policy unfair, but the distilled liquor consumers would find it fair. Since alcoholic products are not considered essential for human existence, the former category of consumers would lack an avenue to petition the government regarding its decision to use a single tax rate across all alcoholic categories. Through a firm and equitable enforcement strategy, the Australian government would manage to enforce the proposed system and could even present it as a neutral tax system that recognises that the effects of alcohol are the same irrespective of whether it is consumed by a wealthy or poor person. The apparent inflexibility of the flat-rate tax would no doubt affect its enforceability and management especially if the fermented liquor manufacturers decide to petition the government. For example, the wine makers could argue that the government is intentionally trying to ‘kill’ wine production in the country despite the estimated $2 billion export revenues it generates and the 60,000 jobs it creates for the Australian economy annually. The Wineries could further argue that the flat rate tax will result in high-alcohol distilled liquor replacing wines as cheap and hence the standard drinks among Australians. As the Treasury Wine Estates note, high-strength spirits are more disastrous to human health than the low-strength wines or beers when consumed in large quantities19. In a 1999 submission however, the government sought to dismiss myths that all wine consumption was healthy by stating that wines too have considerable alcohol content and could therefore be a source of excessive alcohol consumption. Petition by wineries regarding wines not being a source of irresponsible consumption behaviour can therefore be dismissed as erroneous and irresponsible just as was the case when government upheld taxation on cask wine in 199920. In addition to the flat-rate excise tax proposal, the government should consider strengthening partnerships with stakeholders such as liquor manufacturers, and the consuming public in order to succeed in mobilising the resources and goodwill needed to stop or reduce the rate of excessive and harmful alcohol consumption. As stated earlier in this report, alcohol consumption is embedded in the Australian culture. However, too excessive consumption of the same is non-beneficial and only ends up costing the entire society especially in high healthcare costs. RECOMMENDATIONS While it is evident that the proposed flat-rate excise tax would have some fair share of its disadvantages, it is worth noting that it would be a better alternative to the prevailing disjointed taxes where WET is imposed on wines, and the GST tax imposed on beers and spirits. However, it is also worth noting that the flat-rate tax would not provide an all-inclusive solution to the problems brought about by excessive alcohol consumption. Hence, this report recommends that policy makers need to consider combining the proposed flat-rate system with other social interventions such as public education regarding the harmful consequences of excessive consumption of alcohol. Other intervention areas that the government should consider include stiff penalties for drunken driving in order to dissuade people from engaging in the practice; provision of alcohol rehabilitation centres for people who want to recover from addictive excessive alcohol consumption; and provision of assistance to people who are trying to keep off alcohol. Policy formulators should also seek commitment and leadership from the political and opinion leaders in the society. Additionally, they should seek to inform the community about the adverse effects of excessive consumption of alcohol. Monitoring and surveillance is also necessary especially if illegal alcohol imports and use of industrial alcohol is to be stopped. Overall, the redistributive effects of the proposed flat-rate taxation across of liquor categories will be felt most by the low-income alcohol consumers, who incidentally happen to be rated as the excessive consumers. They are among a population demographic whose health is poor, and who lack on skills and experiences that would benefit them in the labour market. The proposed flat-rate tax would succeed in increasing the price of all types of alcohol. Potentially, such an increase in price especially in fermented liquor will lead to a reduction in alcohol consumption especially among problematic drinkers, and is thus likely to lead to the reduction of private and social costs that would otherwise be incurred by the excessive drinkers. BIBLIOGRAPHY AMA submission, ‘Ready to Drink Alcohol Beverages’, (2008) Submission to the 2008 Senate Community Affairs Inquiry, 6. Australian Government, A New Tax System, (1999), Canberra, 87. Collins David and Lapsey Hellen, ‘The Costs of Tobacco, Alcohol and Illicit Drug Abuse to Australian Society in 2004/05’, (2008) Commonwealth Department of Health and Ageing, Canberra. van den Noord Paul and Heady Christopher, ‘Surveillance of Tax Policies: A synthesis of Findings in Economic Surveys’, (2001), Economic Department Working Papers, no. 303, 2. Preventative Health Taskforce, Australia: The Healthiest Country by 2020- National Preventative Health Strategy- The Roadmap for Action, Department of Health and Ageing, Canberra, (2009), pp. 235-255, Refer < http://www.yourhealth.gov.au/internet/yourhealth/publishing.nsf/Content/nphs-report-roadmap > Richard Webb, ‘Alcohol Taxation Reform: Considerations and Options’, (2009) Parliament of Australia- Research Paper, 1. Somchai Richupan, ‘Alcohol Products Taxation: International Experiences and Selected Practices in Asia’, 2005, viewed 14 October 2011, refer , 4. Treasury Wine Estates, ‘Tax reform for a Sustainable Wine Industry’, (2011) Submission by Treasury Wine Estates Ltd for the Federal tax Forum, 3. World Health Organisation, ‘Global Status Report on Alcohol and Health’, (2011) WHO Library Cataloguing-in-Publication Data, Switzerland, 5. Read More