Tuesday, January 10, 2012

Pigovian Taxes and Beer

Pigovian taxes - those taxes that adjust the private costs of consuming a good with the true social costs - are popular in the alcoholic beverage market.  Brewers often complain of excessive taxation: that the current level of taxation adds up to more than the social cost and is, in fact, punitive.

To know if this claim is correct we need to understand the link between alcohol consumption and the deleterious health effects, the additional crime and the traffic accidents that come as a consequence.  Well, a new paper uses the sudden increase in the federal excise taxon beer and wine to measure precisely this effect.

Here is the abstract (emphasis mine):
On January 1, 1991, the federal excise tax on beer doubled, and the tax rates on wine and liquor increased as well. These changes are larger than the typical state-level changes that have been used to study the effect of price on alcohol abuse and its consequences. In this paper, we develop a method to estimate some important effects of those large 1991 changes, exploiting the interstate differences in alcohol consumption. We demonstrate that the relative importance of drinking in traffic fatalities is closely tied to per capita alcohol consumption across states. As a result, we expect that the proportional effects of the federal tax increase on traffic fatalities would be positively correlated with per capita consumption. We demonstrate that this is indeed the case, and infer estimates of the price elasticity and lives saved in each state. We repeat this exercise for other injury-fatality rates, and for nine categories of crime. For each outcome, the estimated effect of the tax increase is negatively related to average consumption, and that relationship is highly significant for the overall injury death rate, the violent crime rate, and the property crime rate. A conservative estimate is that the federal tax reduced injury deaths by 4.7%, or almost 7,000, in 1991.

[HT: Greg Mankiw]


Bill Night said...

A 4.7% benefit does not seem that great, unless it keeps building over time. Have you read the whole paper? I didn't pay for a download.

I'm not an economist (as you can surely tell), and I'm not opposed to sensible taxation, but these questions come to mind:

- I take it they show that consumption actually decreased in 1991? BTW, that was also a difficult year for the U.S. economy.

- Suppose the 2X increase (from P% to 2P%) truly resulted in a 4.7% decrease in deaths. Now, it seems to me like there is probably a diminishing return at some point (or maybe a series of peaks and valleys). Would a 4X increase have caused a 10% benefit? Or would a mere 1.25X increase have caused almost as much benefit.

- Did the benefit continue in 1992 and following years as we got out of the first Bush recession?

- There must be reams of data from elsewhere in the world on Pigovian alcohol taxes -- thinking the Nordic countries especially. Do they show similar public health gains? What about alcohol price hikes due to factors other than taxes (shortages, EU bottle-size regulations) -- do they also positively impact public health?

Patrick Emerson said...

Hi Bill,

Well, if we use the standard $7 million price tab on the value of a life, it adds up in a hurry! But seriously, we are talking of an increase per beer of about 2.5 cents, so the marginal impact of the tax seems pretty big to me.

To your bullet points:

-They identify off of cross-state variation in alcohol consumption, so it is not the overall change in drinking following the tax, but the cross-state differential.

-Yes, this is a linear model they estimate and they cannot speak to non-linear effects of which you speak- in the parlance it is an average treatment effect.

-They look at effects a few years out (up to 1995 I think)

-Yes, there is a fairly extensive literature which shows mixed results. The present authors argue that the research methodology of many prior papers is suspect. I don't know the lit well enough to have an opinion.

priceit said...

There were other things going on in the beer industry in 1991. This was a time when states were lowering blood alcohol limits for driving legally. California and Vermont in fact implemented in 1900.

To answer one of Bill's questions, alcohol related deaths did continue to fall through 1995, and then held fairly stable, however between 1991 and 1995 NM, KA, AL, FL, NC, VA and NH also implemented new lower blood alcohol laws.

So was it the tax or the new lower blood alcohol laws? At a minimum the blood alcohol laws should get credit for saving many of the lives during this period.

Jeff Alworth said...

Interesting discussion. To add to Priceit's comments, a few other factors jump out at me:

>>Not only was this during a time of rising BAC laws, but right when MADD was putting out a lot of high-profile public advocacy stuff.

>>Per capita drinking consumption fluctuates over time, due to factors unrelated to taxation. I assume--but don't see in the abstract--that the study took into account current trends. If consumption was already in a downward trend, this may not be as impressive.

>>Did the study discover how the excise taxes affected retail prices? This seems like the key point--if wholesales and retailers absorbed some or all of the cost, declining consumer demand would be coincidental.

Patrick Emerson said...

You guys are all such a pain in the ass - making me have to actually read the paper carefully.

Come on, I am a blogger!

All right, here you go:

"One way to account for differences in pre-tax trends more systematically is to expand our basic regression specification to include a covariate that measures the previous trend in the outcome variable; in one specification check, the trend is measured as the change in the outcome variable between 1989 and 1990, and in a second check as the change in the outcome variable between 1985 and 1990.
Table 9 presents the results of these two related specification tests. The results using either covariate suggest little evidence of so-called momentum (or anti-momentum) effects. In fact, the coefficients on consumption in 1989 are little changed, even in those cases for which the trend measure is statistically significant. The one exception appears to be suicide, where inclusion of the pre-tax trends generates stronger, statistically significant results than our original model."

Bill Night said...

You're saying a tiny 2.5 cent increase bought a 4.7% benefit? Now I'm interested. Maybe the "devil's advocate" clause that I threw in is more appropriate: would a 5 cent increase have bought a 10% benefit? Although priceit and Jeff have a point about the tighter drinking and driving rules.

Hmmm.... here's a thought: would Pigovian taxes on vehicle miles traveled be a bigger winner in terms of lives saved?

Anyway, I'm glad you're keeping us informed on these things. We may be ready to return to evidence-based methods after the lost decade of faith-based reasoning.