It’s time for a flat tax on alcohol – health campaigners can drink to that

Source: The Telegraph

CHRISTOPHER SNOWDON

15 FEBRUARY 2017

Alcohol can cause problems and there are good reasons to tax it, but Britain’s system of alcohol duty makes no sense. Rather than tax alcohol, the government taxes drinks. A unit of alcohol is taxed at 28p if it happens to be in a glass of whisky but is just 8p if it is in a pint of cider. If the cider is strong, the tax is 7p – unless it is fizzy in which case it is 34p. The tax on a unit of alcohol in a glass of wine amounts to 20p, unless the wine is sparkling, in which case it is 25p.

It is an irrational and arbitrary system. The best justification for taxing alcohol is that it creates costs which have to be paid by people who drink responsibly (or not at all). Although temperance campaigners often claim that drinking costs society £21 billion a year, most of this seemingly gargantuan sum is not paid by taxpayers; it includes all sorts of “emotional” and “intangible” costs, as well as lost productivity costs, none of which are borne by teetotallers. The actual costs to the health service, police service, prison service, welfare system and judiciary amount to no more than £4.6 billion per year. This is not an insubstantial figure, but it is much less than the £11 billion the government scoops up in alcohol duty each year.

A new briefing paper from the Institute of Economic Affairs shows what a fair system would look like. British drinkers currently consume approximately 50 billion units of alcohol a year. To recover the £4.6 billion in costs, there should be a flat rate of tax of 9p on every unit of alcohol sold. That would mean a higher tax on some strong ciders and a lower tax on other drinks. Overall, it would mean lower taxes, but even after this reform most of our drinks would still be more expensive than the European average. In the EU-27, the average duty on a pint of lager is 14p (we currently pay 52p) and the average tax on a bottle of wine is 44p (we currently pay £2.08).

This is not the first time the idea of taxing alcohol by the unit has been suggested. Economic think tanks and temperance groups alike have called for the same thing. In 2011, the Institute for Fiscal Studies concluded that “it would seem desirable to treat different types of alcohol in the same way in the tax system” and, in 2016, the Alcohol Health Alliance called on the government to lobby the EU so that “drinks in all categories can be taxed according to their strength”. This raises the salient point that EU regulation currently prohibits a sensible system of per-unit alcohol taxation. As luck would have it, this will not be an obstacle for long.

The current tax regime is characterised by paternalism and protectionism, neither of which can be justified in a society that treats its citizens as adults. In an effort to clamp down on high-strength alcohol, George Osborne created a new, high tax category for beers and sparkling ciders with an alcohol content of more than 7.5 per cent.

As a result, there is now a wide range of cheap, high-strength beers and sparkling ciders with an alcohol content of exactly 7.5 per cent. Osborne’s attempt to give the drinks industry an incentive to produce lower strength beer has been equally unsuccessful because his lower rate of tax only applies to beers with an ABV of up to 2.8 per cent. This limit, which is also derived from EU law, is lower than the market will stand. It would make more sense to set the limit at around 3.6 per cent, which was the typical strength of ale in Britain before the rise of stronger continental lagers.

But the best approach would be to tax all alcoholic drinks by unit at the same rate. A 9p per unit tax would pay for all the costs imposed on public services by alcohol abuse and would incentivise the development of lower strength drinks across the board. It would effectively create a minimum unit price – as temperance campaigners have demanded – and would tackle alcohol duty evasion. It is time to tax alcohol, not fluids.