Excise Tax Essay Example

  • Category:
    Law
  • Document type:
    Essay
  • Level:
    Undergraduate
  • Page:
    3
  • Words:
    2003

Excise Tax 8

Risks for the Tax Department after a 20 Percent Excise Reduction on Mango-Based Liquor

INTRODUCTION

In literature, it is easy to find typical reasons why governments increase excise taxes. Such reasons include reimbursing the society for costs associated with using specific products, or reducing the demand for products that are considered detrimental or luxurious1. Scouring through literature however, one does not get typical reasons why a government may lower excise tax on specific products. While liquor is not necessarily classified as luxury item that should attract a specific amount of excise tax, one can argue that their negative impact it has on the society is justification enough for the excise tax it attracts. In this paper’s case however, the mango glut has attracted government’s attention, which has provided solace to farmers by reducing the excise tax to mango-based liquors by 20 percent. There is little doubt that the excise tax reduction will affect the mango demand positively by encouraging more liquor manufacturers to adopt the use of mangoes. It is also apparent that the tax department will feel the effect of the government directive. This essay seeks to establish the exact consequences that the 20 percent excise tax reduction on mango-based liquors will have on the tax department. The essay notes that the taxman will probably incur both direct and indirect consequences. The essay concludes by observing that the tax department’s main challenge would be balancing the interest of mango farmers and the societal need of making alcohol manufacturers offset the market imbalance created by the consumption of alcohol.

IMPLICATIONS OF THE REDUCTION FROM AN INDUSTRY-BASED PERSPECTIVE

To start with, the 20 percent excise tax reduction on mango-based liquor will not only prompt manufacturers to use more mangoes, but will also result in the saturation of the market with the same products. In order to create an appeal for the products, the manufacturers and other players in the supply chain may have to enhance their marketing practices in order to enhance consumer appeal towards the same products.

The mango glut notwithstanding, the enhanced market brought about by lower excise rates and increased demand from the consumers may affect the supply side, which may eventually lead to more farmers growing mangoes in the hope that the demand is long-term. Eventually, mango-based liquor may become so popular to the point of affecting the sale of other liquors made from different ingredients. The taxman may therefore have to content with lower excise tax directly from the mango-based liquor, and indirectly from lower sales in other types of liquor. The increased production and consumption of the mango-based liquor may however counter the tax revenue deficit, as one would expect the high volumes churned by the manufacturers and consumed in the market to provide a sizeable amount of tax revenue all be it at a reduced percentage.

As a revenue-raising device, the reduced excise tax would amount in mixed fortunes for the taxman depending on whether the market will react to the changes by consuming increased amounts of mango-based liquor. In a scenario where lower prices do not attract increased demand of such products, the taxman would have to be content with lower revenues. However, should the market demand for mango-based liquor increase, the taxman might end up receiving increased amounts of taxes due to the high liquor volumes traded. Even if the case would without doubt lead to lost revenue, the tax department would have to abide by the government’s decision since the latter has the mandate to ‘reallocate productive resources during a national emergency.’2 There is little doubt that the mango glut and the imminent losses to farmers fits into the ‘national emergency’ criteria especially because the government has to consider the society’s best interest.

Without ignoring the fact that excise tax is, in particular instances used to limit the consumption of alcohol, the tax department most likely encounter conflicting opinions regarding the tax reduction directive. For example, while it is acceptable that the lower taxes would encourage more manufacturers to consider using mangoes as their main liquor-making product, it is also acceptable that the resulting products would probably retail at more affordable prices when compared with others. As a result, one would expect the affordability of the mango-based liquors to attract new consumers. This line of thinking corresponds to the forces of demand of supply in the alcoholic industry as advanced by Fogarty3.

CONSEQUENCES ON THE TAX DEPARTMENT

As argued above, the 20 percent excise tax reduction to counter the mango glut may interfere with the performance of the economic system since consumers may switch preferences especially since the mango-based liquor may retail at lower prices. Consequently, the tax department may lose revenue from liquors not targeted by the tax reduction.

Considering the competitive nature of most markets, one would expect liquor manufacturers who use other products such as grapes or apples to petition the tax department on the selective and preferential treatment of mango-using manufacturers. As Long notes, ‘The tax structure should be consistent with accepted norms of equity as to the distribution of the tax burden.’4 In order to enhance equity among players in the liquor industry, the tax department may have to limit the tax reduction to a specific time by which the mango glut need to have cleared, or may have to consider other measures to appease other liquor manufacturers. The main problem with the first alternative is the possibility of mango glut occurring perennially during the mango-harvesting season. If such were the case, the tax department would have to consider a lasting solution that would not only enhance the use of mangoes in liquor manufacturing processes, but would also enhance the equity principle among all industry players. According to Webb5 , decisions touching on taxes often entail trading off several considerations. Such include the tax department’s need to collect revenue, possible impact of the tax on the economic behaviour in the targeted market, enforceability of the tax, and equity.

If the reduction have affected revenues to the extent of making excise taxes from mango-based liquor a non-worthwhile part of the general tax structure, the tax department would also have to devise ways of revising the same or advising the government to reconsider its decision on the same. In addition, and as Freebairn argues, the excise tax is imposed on alcohol as a way of ‘correcting’ the market failure created by the supply side when it does not provide alcoholic products at a ‘socially optimal level.’6 Translated, the assertion by Freebairn means that without imposing excise tax on alcoholic beverages, market prices that the same products retail for would not reflect the social costs associated with the consumption of the same. For example, one may argue that increased consumption of mango-based liquor will lead to an increase in unruly behaviour, which would consequently require more policing. The question would then be raised as to whom would pay for the policing services if indeed the reduction of excise tax on mango-based liquor, was to such an extent as to have no significance to the revenue collected by the tax department. The revenue to such a question would probably lie in the fact that other liquor products made from other ingredients would still attract excise tax, which the tax department would use to offset the deficit created by the reduced rates on mango-based products. Since this does not meet the equity principle necessary in setting up tax rates, the tax department would need to devise a plan that upholds fair play in the liquor industry.

As Long7 notes, excise taxation gives consumers an incentive to avoid the tax by spending more on non-taxed or lower taxed items. This would cause an imbalance in the liquor market since the selective consumer behaviours would no doubt affect how the economic system functions. One would thus expect the reduction to introduce regressive tendencies whereby, the mango-based liquor with limited revenue potential for the tax department would sell in large volumes, while the sale of other liquors that hold higher revenue potential for the department reduce significantly.

As evident when excise tax was introduced on wine, public outcry targeting the tax department can lead to a reconsideration any position or policy proposed by the government8. As such, it is possible that industry players infuriated by the impact that the 20 percent excise tax reduction, would raise an outcry demanding for a fairer playing ground. If the tax department fails to respond in good time and allows the 20 percent tax reduction to become the norm on mango-based liquor, one can expect more consumers to adjust and shift their preferences to the same especially considering the price advantage. Consequently, the tax department would have to raise revenue from other products in order to deal with the externalities that arise from consumers drinking habits. Such externalities might include motor vehicle accidents9, the cost of law enforcement, costs of short- and long-term healthcare needs for the liquor consumers, costs of reduced productivity of labour participation10, and the distress or anxiety caused to family members and friends11.

CONCLUSION

Overall, it is rather apparent that the tax department would have a hard time trying to balance the farmer’s need to shed-off their mangoes to a sector that can utilise them, and the need to uphold the manufacturer of liquors accountable for the social consequences of alcohol consumption. Additionally, the tax department would have a hard time trying to balance the interest of different liquor manufacturers and providing them with a fair and equitable playing ground.

References

Australian Bureau of Statistics, ‘Alcohol Consumption in Australia: A Snapshot, 2004-05’, (2006) Catalogue no. 4832.0.55.001, Canberra.

David Collins & Hellen Lapsey, ‘The Cost of Tobacco, Alcohol and Illicit Drug Abuse to Australian Society in 2004/05’, Commonwealth Department of Health and Ageing, Canberra. (2008), viewed 08 September 2011, refer <
http://www.health.gov.au/internet/drugstrategy/publishing.nsf/Content/34F55AF632F67B70CA2573F60005D42B/$File/mono64.pdf>

Ian Crawford, Michael Keen., & Stephen Smith, ‘Value Added Taxes And Excises’, Paper Prepared for the report of a Commission on Reforming the Tax System for the 21st Century, London, UK. (2008), viewed 08 September 2011, refer <
http://www.ifs.org.uk/mirrleesreview/dimensions/ch4.pdf>

James Fogarty, ‘The Demand for beer, Wine and Spirits: Insights from a Meta Analysis Approach’, (2009) 31 AAWE Working Paper.

John Freebairn, ‘Special Taxation of Alcoholic Beverages to Correct Market Failures’, (2010) Wine Economics Research Centre, Working Paper no. 0610, 5.

Kym Anderson, ‘Excise and import Taxes on Wine Beer and Spirits: An International Comparison’, (2009) Paper for the Pre-AARES Conference Workshop on the World’s Wine Markets by 2030, 6.

Richard Webb, ‘Excise Taxation: Developments since the Mid-1990s,’ (2006) Parliament of Australia, Research brief 8.

William Long, ‘Taxation’, (1965) 7 BCL Rev 123-124.

Wine America, ‘Position paper on Wine Excise Tax Increases’, (2009), <http://www.wineamerica.org/issuepolicy/docs/Excise%20tax%20v9.pdf>

1
Wine America, ‘Position paper on Wine Excise Tax Increases’, (2009), <http://www.wineamerica.org/issuepolicy/docs/Excise%20tax%20v9.pdf>

2 William Long, ‘Taxation’, (1965) 7 BCL Rev 123-124.

3
J Fogarty, ‘The Demand for beer, Wine and Spirits: Insights from a Meta Analysis Approach’, (2009) 31 AAWE Working Paper.

4 William Long, ‘Taxation’, (1965) 7 BCL Rev 123-126.

5
Richard Webb, ‘Excise Taxation: Developments since the Mid-1990s,’ (2006) Parliament of Australia, Research brief 8.

6
John Freebairn, ‘Special Taxation of Alcoholic Beverages to Correct Market Failures’, (2010) Wine Economics Research Centre, Working Paper no. 0610, 5.

7 William Long, ‘Taxation’, (1965) 7 BCL Rev 126.

8
Kym Anderson, ‘Excise and import Taxes on Wine Beer and Spirits: An International Comparison’, (2009) Paper for the Pre-AARES Conference Workshop on the World’s Wine Markets by 2030, 6.

9
Australian Bureau of Statistics, ‘Alcohol Consumption in Australia: A Snapshot, 2004-05’, (2006) Catalogue no. 4832.0.55.001, Canberra.

10 David Collins &Lapsey, Hellen, ‘The Cost of Tobacco, Alcohol and Illicit Drug Abuse to Australian Society in 2004/05’, Commonwealth Department of Health and Ageing, Canberra. (2008), viewed 08 September 2011, refer <
http://www.health.gov.au/internet/drugstrategy/publishing.nsf/Content/34F55AF632F67B70CA2573F60005D42B/$File/mono64.pdf>

11 Ian Crawford, Keen Michael., & Smith, Stephen., ‘Value Added Taxes And Excises’, Paper Prepared for the report of a Commission on Reforming the Tax System for the 21st Century, London, UK. (2008), viewed 08 September 2011, refer <
http://www.ifs.org.uk/mirrleesreview/dimensions/ch4.pdf>