Price elasticity and implied tax revenue effects for alcoholic beverages – Evidence from Poland, France and Spain

In Europe a trend towards higher taxation of alcoholic beverages can recently be observed. While it is typically argued that higher taxation of alcohol is necessary to curb excessive consumption and its associated health costs, a tax revenue motive is very often ongoing in the background. Moreover, alcoholic beverage types are taxed very differently and in most cases, spirits drinks are much higher taxed than beer or wine. The underlying idea of a double dividend, i.e., the possibility of raising tax revenues while reducing socially unwanted behaviour, appears to be attractive for many policy makers. However, whether it is possible to raise additional tax revenues from the taxation of alcoholic beverages and/or reducing excessive consumption crucially depends on the functioning of the market for alcoholic beverages. The aim of this study is therefore to shed more light on the functioning of the market for alcoholic beverages and the implied potential to raise tax revenues. The key parameters which determine the impact of taxation on the consumption are the price pass-through of the tax burden and the price elasticity of demand for alcoholic beverages. The price pass-through quantifies the extent to which excise duties and tax increases are passed on to the consumer price, whereas the price elasticity of demand measures the effect of consumer price changes on demand. Additionally, the cross-price elasticity between different types of alcoholic beverages (beer, wine and spirits) as well as non-alcoholic drinks can potentially impact the effects of tax changes on consumption, as some goods are seen as complements while others act as substitute to each other. This study aims at estimating the main parameters for selected EU countries. A special emphasis is put on identifying price elasticities over different drinking behaviours (light, moderate and heavy drinkers) and socio-economic groups (high, medium, low income). Based on the estimated parameters the tax revenue effects for different tax reform scenarios can be simulated for each country.