The Unintended Effects of Alcohol “Sin” Taxes: UK Edition

Politicians and their academic and media supporters fail to see the human action aspects of social policies. 

For sin taxes, not only do they overestimate their understanding on the objectivity of human values, they also treat mathematical models having the same effects on the people, particularly, they mistake tax revenues as having some linear correlations with tax rates.

The Institute of Economic Affairs in a study shows why the concept of Sin taxes backfires. Here’s the summary (bold and italics original) 

The Treasury is losing as much as £1.2 billion every year to the illegal alcohol industry. A new report, Drinking in the Shadow Economy, demonstrates how illicit alcohol consumption is becoming a permanent and growing problem due to excessive taxation. 

The damaging effects of counterfeit alcohol

Failing to deal with counterfeit and smuggled alcohol threatens not only public cash, but public health and public order. Counterfeit alcohol can contain potentially life threatening levels of dangerous chemicals, whilst alcohol smuggling is linked to other illegal activities such as drug dealing, violence and money-laundering.

High taxes are encouraging the growth of the illicit alcohol market

It is evident that high taxes are causing this boom in the illicit alcohol market. As prices rise, consumers are increasingly turning to the more affordable options available in the shadow economy. Government policy might intend to improve people’s health, but it may be having the opposite effect.

With the number of seizures of counterfeit alcohol rising five times between 2008/09 and 2010/11, and growing reports of counterfeit spirits being sold by both licit and illicit retailers, it is crucial that the government reconsiders its strategy in dealing with alcohol pricing.

High alcohol taxes do not reduce alcohol consumption

Contrary to popular belief, making alcohol more expensive is not an effective way of reducing drinking rates or the problems associated with excessive alcohol consumption. Britain and Finland have some of the highest alcohol taxes in the world and yet the amount of drink consumed in these countries is the same as in places such as France and Spain, where alcohol is more affordable.

Commenting on the report, its author, fellow of the Institute of Economic Affairs Christopher Snowdon, said:

“The government’s focus on maximising tax revenues is short-sighted and dangerous. Aside from losing money by encouraging consumers to find cheaper illicit alternatives, public health and public order are also being put at risk by high prices. Policy-makers ought to take the threat of illicit alcohol production seriously when considering alcohol pricing in the future.”

"There is a clear relationship between the affordability of alcohol and the size of the black market. Politicians might view the illicit trade as a price worth paying for lower rates of alcohol consumption, but this research shows that the amount of drink consumed in high tax countries is exactly the same as in low tax countries."

“Minimum alcohol pricing might seem like a quick fix to tackle problem drinking, but it is likely to cause many more problems by pushing people towards the black market in alcohol."

The complete study in pdf format here

Here are some interesting charts:

The shadow economy has tight correlations with corruption

So as with the relationship between shadow economy/corruptions vis-a-vis illegal and bootleg alcohol consumption.

Sin taxes has almost the same effects as the prohibition laws where the only difference is in the degree.

To quote the author of the study Christopher Snowdon 

Contrary to temperance rhetoric, high alcohol taxes are not necessarily good for public health because, although excessive alcohol consumption undoubtedly carries risks to health, so too does moonshine. Counterfeit spirits and surrogate alcohol frequently contain dangerous levels of methanol, isopropanol and other chemicals which cause toxic hepatitis, blindness and death. These are the unintended consequences one associates with prohibition, albeit at a less intense level than was seen in America in the 1920s.

It should not be surprising that excessive taxation encourages the same illicit activity as prohibition since the difference is only one of degrees. As John Stuart Mill noted in 1859: ‘To tax stimulants for the sole purpose of making them more difficult to be obtained is a measure differing only in degree from their entire prohibition, and would be justifiable only if that were justifiable. Every increase of cost is a prohibition to those whose means do not come up to the augmented price’ (Mill, 1974: 170-171).