Leviathan models of excise?

As I like to be disagreeable, I'll disagree with one part of Luke Malpass's rather nice piece in The Spectator (Aussie edition). I'll pick on the part I disagree with; I like the rest of it (especially the parts citing me, of course).

Last Tuesday, New Zealand’s Law Commission produced a report arguing for the total overhaul and tightening of New Zealand’s liquor legislation. The next day, governments in Australia and New Zealand announced Draconian new taxes on cigarettes: both raising the excise dramatically, and Australia introducing compulsory plain packaging. Goodbye nanny government, hello matron state.

Predictably, the justification for such restrictions and tax hikes comes under the increasingly applied and vacuous category of ‘social cost’, the cost to society of producing and consuming these unhealthy products. This is a mixture of economic calculations designed to arrive at a headline figure of what these ‘dangerous’ goods ‘cost’ society.

Of course, a lot of these claims are nonsense, because what many public health economists and academics do is calculate the cost of an activity and either dismiss or discount the possible benefits arising from it. For example, you are assumed to get no benefit out of having a drink.

...

The worrying thing about all this is the passive attitude that Australians and New Zealanders take to these recommendations. People think it reasonable that smokers be hounded out of existence and drinkers confined to some awful homemade bars in a garage, simply because they enjoy something unhealthy that, let’s face it, an awful lot of people like to quietly indulge in. It also grates that for all its rhetoric about health, government doesn’t really care about stopping smoking and drinking at all, only raising revenue — otherwise it would raise excise by 600 per cent and cut out both.

I'm of course totally with Luke on the problems with "social costs" measures. But I'm not sure about the last line here quoted. If government cared only about raising revenue, we wouldn't see tobacco and alcohol priced such that consumers remained on the inelastic part of their demand curves: government could increase tax rates and increase total tax revenues.

But a 600% increase would possibly push beyond the Laffer-maximum and, if done all at once, would significantly reduce tax collection by encouraging the quick establishment of a clandestine market: bootlegging. If the goal were to cut consumption over time, and if there's a risk of consumer exit to a clandestine market, then the government could well implement something like a limit pricing model where price increases are always just below consumers' trigger points for switching to the illegal market. If there are economies of scale in bootlegging, making sure that there are always only a few folks that are willing to switch over with any tax increase probably matters.

I'd also expect that making home distillation illegal would be a somewhat important part of a Leviathan alcohol excise tax package; it's legal in New Zealand to distill alcohol for home use. I'd be very curious to know the elasticity of home distillation with respect to alcohol excise tax increases, but I'd be worried that any such estimates would fuel calls for bans. Recall of course as well that legal home distilling makes illicit supply all the easier: who's to say that the few gallons of 90% pure alcohol you've distilled wasn't for home use instead of for sale to the slightly dodgy bar down the road that uses it as house vodka in mixed drinks.

So, I'm not sure that a government that wanted to stamp out all use would go for an immediate 600% increase, and I'm not sure that current tax rates are commensurate with a revenue-maximization model. You could probably build a model where dynamic effects mean you want to price on the inelastic part of the curve if the new customer participation elasticity is greater than the current customer consumption elasticity, but I'm not sure that's the simplest explanation. I'd tend more to reckon that taxes go as high as they can (barring the Laffer max) given the constraint of voter push-back; lots of folks hate smokers but many are drinkers. And, as smoking becomes more and more concentrated among the lower deciles, it'll get easier and easier to play on middle class abhorrence of lower class behaviours to further increase taxes.

If I had to give advice to the healthists, I'd suggest campaigns for differential excise tax based on whether the drink is consumed by boguns and/or teenagers. If the median voter associates the drink with the kind of people they like to look down on, they'll be more likely to go for it. So differential taxes on cask wine, RTDs ... whatever you see folks drinking in South Auckland or in Aranui. Plus minimum price legislation on beer so that nothing is cheaper than Tui and Export Gold, because only the wrong kind of people would ever consider drinking something cheaper than Tui or Export Gold. I'd personally draw the line a bit north of Tui or Export, but my beer tastes are more upmarket than the median voter would go. When I last lectured the calc stream of micro, I used Tui as prime example of an inferior good (you buy less as you earn more).