Are Alcoholic Drinks Taxed Too Heavily in the UK - Essay Example

Are alcoholic drinks taxed too heavily in the UK This essay addresses the issue of whether tax revenue from alcohol drinks is enough high tocover the state medicine expenditures for different accidents and diseases, caused by alcohol use. To estimate, if it is possible and necessary to increase the tax units, we are to use some data. At first, we widely use health care expenditures. In fact, this value increases each year. To provide a detail analysis it is better to have statistics about expenditures division into those, caused with spirits, beer and wine. Then, we used tax units, sales and sales prices data of each kind of drink. Some troubles can be met with profitability of sales (in detail later). All this data can help us to calculate fair tax rates both in simple model and entertaining health care expenditures. Introduction In 2002 British experts alerted, that alcohol misuse cost state medicine about 3 billion. More than 28 thousands people annually receive treatments in hospitals due to alcohol poisons and dipsomania. According to charitable organization "Alcohol Concern" about 33 thousands of people died from various alcohol diseases annually in the UK. Besides each six of those who get hurt, uses alcohol before an accident. This amount grows up to eight-tenth. Doctor Chris Looke from a University hospital of a little town in Ireland, who participated in "Alcohol Concern" researches, admonishes, that state medicine will bankrupt, if no measures are taken to reduce alcohol misuse. Doctor says, medicine workers feel despair. Alcoholism is one of the reasons of it. Alcohol consumption depends of our living standard: More better we live, more alcohol we use. Any kind of statistical data can prove it. According to "Alcohol Concern" researches, we observe constant growth of different alcohol diseases, especially among people of 27-30 years old. The doctors are also these statistics figurants. More than a half of young doctors misuse alcohol. Alcohol Concern Director, Eric Appleby, often says that his organization wants to attract attention to alcohol misuse problem and explain how to wrestle with it. Only nowadays, medicine institutions start paying necessary attention to this problem. But why Government doesn't take all necessary measures to help state medicine Great sums of money are wasted for avian influenza prophylaxis, when some tens died all over the world, while Government takes no plunges against alcohol misuse. We know about one strong instrument, which can help with this problem. Yes, this is tax policy. Let's analyze in this research, in what way correct tax policy can save not only great amount of money, but also thousands of people lives. But, firstly, we are to investigate the objectives of tax policy in the UK. Review of the literature There are many articles, analyzing the tax rates from different opinions using various techniques and methods. In our empirical project we used some results from "Alcohol Taxes, Tax Revenues and the Single European Market" (1999) by Ian Crawford, Zoe Smith and Sarah Tanner from the Institute for Fiscal Studies. In this paper the authors used long-term trends in alcohol for each alcohol drinks, extended a general approach, including cross-price effects. Also we've used the research "Alcohol and the Workplace" produced by Institute of Alcohol Studies, 12 October 2005. The authors wrote there about alcohol abuse, methods of identification alcohol dependence, monitoring situation in the UK. In the Prime Minister's Strategy Unit "Alcohol Harm Reduction Strategy For England" we found some data till 2004 about alcohol harm in the UK. In "The Case of Spirits Duty" we've found some results of simple model, where authors offered to calculate an optimal tax rates without using health care expenditures. Nevertheless these results became useful for us. But, unfortunately, no articles and researches introduce us to calculating optimal tax rate of each alcohol drink, taking medicine expenditures into account. So that's why we decided to make an empirical project exactly on this topic. Main body We shall first consider a single good S (spirits) as a type of good that has no related goods (no substitutes or complements), and assume that the spirits are subject to a unit tax T. The following notations are adopted: The sale price Sales, Unit tax Tax rate, Own-price elasticity, Tax revenue, After both sides total differentiating we have, (*) In a simple model we are interested in how revenue changes when the spirits tax rate changes, There are three cases: 1. Increasing the tax rate increases tax revenue. The average tax rate is below the revenue-maximizing rate 2. Increasing tax rate decreases tax revenue. The average tax rate is above the revenue-maximizing rate 3. Changing tax rate results in no changes in tax revenue. The average tax rate is at the revenue-maximizing rate . Equation (*) can be further simplified and re-arranged to become (**) Clearly, with estimated elasticity and data on price and tax , one can calculate (). Its sign determines whether the current tax rate is below, at or above its revenue-maximizing level. At we have the revenue-maximizing average tax rate , (***) This is the inverse elasticity rule. According to the inverse elasticity rule, goods with a low elasticity have a high revenue-maximizing tax rate, whereas those with a high elasticity have a low revenue-maximizing tax rate. Note that the revenue maximizing rate r* exists only for . When , the tax rate that satisfies the condition is . This is clearly impossibility. Like most other studies, our demand system of alcohol drinks includes three product groups: spirits (S), beer (B), and wine (W). The price of one product affects the demand for all the products. A change in spirits duty, through changes in spirits price, affects demand for spirits as well as for beer and wine, which in turn affects tax revenues from the sales of all the three products. The framework developed below assumes that spirits have two related goods: beer and wine. The following additional notations are adopted for beer B and wine W: Cross-price elasticity with beer: the effect of a change in the spirits price on the sales of beer, Cross-price elasticity with wine: the effect of a change in the spirits price on the sales of wine, Total revenue from the taxes on spirits, beer and wine are It is quite enough variables, if you analyze the model of closed alcohol market, calculating the tax revenue, and its maximum rate. But we decided to make wider research and introduce some more variables, which can help us to understand the correct situation with alcohol in the UK. As we've told, the alcohol (beer, wine, spirits) sales depend on consumers' level of income. That's why we introduce next variables: I - the level of consumer's income (there are different ways of its defining, let's consider here the average month income); PoS - profitability of sales, can be calculated by formula: . Why did we introduce this variable Possibly, we'll ought to increase Tax unit to some level, when the total price of some drinks is too high, and people will buy it far less then before. Surely, enterprises and companies will disagree to take great losses. That's why it's necessary to calculate critical value PoS* of this coefficient PoS. It can be defined by analyzing current situation with most popular enterprises, producing alcohol drinks. State government can't introduce tax unit on an extremely high level, as it may cause waves of protest not only among entrepreneurs, but among consumers as well. So later we'll use inequation to observe this condition. PoS is average among companies. About next variables we must write in detail. In fact, some organizations, such as "Alcohol Concern", and state medicine have approximate statistics about accidents, happened because of using alcohol, different diseases, as alcohol dependence consequence and the ratio of all this troubles, subject to alcohol drink type, which caused that or another problem. What does it mean For instance, spirits are heavier than beer; they act in a human body quicker than easy drinks. That's why we can suppose, that bad accidents happen more frequently after drinking spirits, than beer. So now we introduce such a variable as HCE - health care expenditures. Specialists, who are interested in statistics of this question, can divide it to the next parts: , - health care expenditures, "thanks" to spirits drinking, - health care expenditures, "thanks" to beer drinking, - health care expenditures, "thanks" to wine drinking, - other health care expenditures, which can't be classified to one of three previous groups. These values participate in the next value defining: balance level for spirits , balance level for beer , balance level for wine . R-values for each kind of drink were defined earlier. Tax revenue R=TS, tax revenue, multiplied for sales. For each drink BL-value shows the ratio of tax revenue R (state benefits) to health hare expenditures (state losses). Likewise we can define total BL-value: , Attention! Now it is time to compose a sum, solving of which can become a significant result even for the government. Let's call it "BL-optimization sum". "BL-optimization sum" Here we are to define the function to optimize and conditions, which the values must answer. So, we are to maximize coefficient. At the same time sought tax rates (for each kind of drink) mustn't violate the next conditions: , - tax rate for spirits, - its optimal value, , - tax rate for beer, - its optimal value, , - tax rate for wine, - its optimal value. And, of course, . So "BL-optimization sum" is , conditions: To specify all the sum's variables let's use the previous formulas . In fact, here we needn't division HCE value into its parts, we'll use it later. Then, As you remember, is a result from a simple model. So, we'll get If to use a simple transformation we can simplify each inequation: . Finally, Before explaining new result, let's notice, that it is unnecessary to transform PoS value in any way, because, different experts can use different coefficients. One possible variant we've written earlier. So, we've got the "BL-optimization sum" It is important that we have no P-value, it means that here we are not interested in the sale prices . But we must know price change . There is a good deal of various numerical (analytical, graphical) optimization methods to solve this sum. Surely, we can get to know some new values and constants during the data gathering process. For instance, we'll be obliged to take some constant value of beer tax unit due to some reasons (strong position of beer producers etc.), then the number of unknown variables will decreased, and our sum will become simpler. In any case, it is quite possible to find suitable solution, namely . But what is the next step Imagine, that we've found some solution BL* of "BL-optimization sum". Now we have another sum: we are to find the values of , which provide our maximum value BL* and compare them with current real values. Then we can make a conclusion if the alcoholic drinks are taxed too heavily in the UK or not. To find we can use next conditions. At first, or As far as you remember, we defined cross-price elasticity at the first part of our research. It is time to use it. For instance, cross-price elasticity with beer: the effect of a change in the spirits price on the sales of beer, . The same formulas for change in the spirits price on the sales of beer can also be used. By the way, we can use 6 such formulas for 3 kinds of drinks, because - these are different values with different sense. Using numerical methods or any other techniques we can select the most optimal tax values and compare them with current ones. Conclusion So, as you see, we analyzed one of possible model of finding optimal alcohol tax units. Depending on specific sum requirements and data, you can use special solving technique. In fact tax rates is not optimal from our point of view, as no one considered all values and data, we wrote about. Moreover, tax rates should not so much be increased as redistributed to maximize our BL-coefficient. Detail consideration of all possible variants can be a work for a serious dissertation. Also, analyzing the golden mean between state tax revenue and health care expenditures must be useful and important for the UK government. References 1. Baker, P. and V. Brechling "The impact of excise duty changes on retail prices: Evidence for the UK," Fiscal Studies, vol.13, no. 2, May 1992 2. Maynard, A. and P. Kennan "The economics of alcohol abuse," British Journal of Addiction, vol.76, 1981, pp. 339-345 3. Institute of Alcohol Studies "Alcohol and the Workplace," October 12, 2005 4. Ian Crawford, Zoe Smith and Sarah Tanner "Alcohol Taxes, Tax Revenues and the Single European Market," the Institute for Fiscal Studies, 1999 5. http://www.alcoholconcern.org.uk 6. http://news.bbc.co.uk/1/hi/health 7. http://www.statistics.gov.uk Read More