Assessing Patterns of Alcohol Taxes Produced by Various Types of Excise Tax Methods--A Simulation Study

Abstract

Aim: To examine patterns of tax burdens produced by specific, ad valorem, and various types of combination taxations.

Method: One hundred unique hypothetical alcoholic beverages were mathematically simulated based on the amount of ethanol and perceived-qualities contained. Second, beverages were assigned values of various costs and tax rates, and third, patterns of tax burden were assessed per unit of ethanol produced by each type of tax method.

Result: Different tax methods produced different tax burdens per unit of ethanol for different alcoholic beverages. The tax burden produced by the ad valorem tax resulted in a lower tax burden for low perceived-quality alcoholic beverages. The specific tax method showed the same tax burden for both low and high perceived-quality alcoholic beverages. However, high perceived-quality beverages benefited from a lower tax burden per beverage price. Lastly, the combination tax method resulted in a lower tax burden for medium perceived-quality alcoholic beverages.

Conclusion: Under the oligopoly market, ad valorem taxation encourages consumption of low perceived-quality beverages; specific taxation encourages consumption of high perceived-quality beverages; and combination tax methods encourage consumption of medium perceived-quality beverages.