Optimum alcohol taxation: balancing consumption and external costs

This paper considers alternative approaches to the evaluation of the total cost of alcohol consumption in Australia. It calculates the impact of alternative tax rates on beer, wine and spirits separately and the 'consumption cost' of these taxes in terms of the distortion caused to consumption patterns. Two separate analyses are carried out. First optimal taxation is calculated which minimises the total loss from the 'consumption cost' of taxation plus the external cost of alcohol consumption. Secondly, the benefits of life are separated from other benefits and the impact of tax expressed in terms of the cost per life year gained. Conceptualised in this way, the results of this 'tax' program may be expressed in the same way as other health programs, namely as a net cost per life year gained. Alcohol taxation may then be compared with other life saving interventions. The chief conclusion reached is that in Australia there is a very compelling case for a new tax base and for a very significant increase in the rate of alcohol taxation.