Examination of Witness (Questions 410
WEDNESDAY 17 JANUARY 2001
410. Dr Crawford, I welcome you to this session
and ask you, for the purposes of the record, please to introduce
yourself to the Committee.
(Dr Crawford) My name is Ian Crawford. I work for
the Institute for Fiscal Studies which is an educational charity.
It draws about one-third of its funding from the Economic and
Social Council and one-third from charitable foundations and about
one-third from specific grants from government departments on
411. Do you receive any grants from the drinks
(Dr Crawford) No. We have some corporate
members who pay about £1,000 a year and it is possible, though
I have not checked.
412. So there is not a large vested interest.
(Dr Crawford) Not for £1,000.
413. At this stage can I ask, do you have any
brief opening submissions you would like to make to us or are
you quite happy for us to go straight on to questions?
(Dr Crawford) I am happy to have questions.
414. Can I begin then by discussing tax policy
design. Your memorandum argued that while, "economic arguments
may be used to justify imposing additional taxes on alcohol, setting
the levels of tax rates each year is more likely to be a question
of raising revenue". Other memoranda have described the adverse
impact of alcohol taxes. For example, the Scotch Whisky Association
pointed to its impact on employment, arguing that "Duty discrimination
hinders sales and threatens jobs". Many of these jobs are
in economically disadvantaged areas of Scotland. The question
is what, if any are the wider adverse effects of alcohol taxes?
Should those taxes be set with broader objectives in mind? What
other economic objectives might be included?
(Dr Crawford) There is a general presumption in tax
design issues that there should be stability of price between
goods, except for three main reasons. They are: designing a very
efficient tax system. What that says when it comes right down
to is that what you should do is tax more heavily those goods
for which demand is not terribly price responsive. So a good example
of an efficient tax would be a tax on tap water or something like
that. It would terribly efficient. People would cut down a bit
but below a certain level they would just have to pay the tax.
Or the poll tax; that was about the most efficient form of tax
you can have.
415. But not a popular tax.
(Dr Crawford) Exactly, that is a tax essentially on
being alive so you get relatively little tax avoidance. If you
wanted to make the casewhat we have at the moment for the
structure of alcohol taxation is that there are two main ways
of looking at it, which is tax being on the alcohol and tax on
the proportion of price. Beer is the least heavily taxed and spirits
are the most heavily taxed. If I was a government economist writing
an ex-post rationalisation of the way we tax alcohol in this country,
I would have to try and claim that beer is a very price elastic
good whereas the demand for spirits is much less responsive to
increases in price. I do not have any good evidence that says
that. The evidence we have come across and generated ourselves
says the opposite. That is one: efficient taxation would give
you a reason for taxing things differently. The second one would
be distributional concerns. Sometimes it may be a good idea to
tax less heavily those goods which are consumed in greater proportions
by poorer households. This is one of the reasons we do not have
VAT on food because it is a large proportion of the household
budgets at the bottom end of the income distribution scale than
at the top end. It is probably the reason why VAT on domestic
fuel was reduced. But none of the forms of alcoholbeer,
wines and spiritshave particularly strong distributional
characteristics. If you take beer, for example, it forms the largest
part of household budgets in the middle of the income distribution.
So it is middle income households that would benefit from a relatively
low tax on beer. So it is hard to argue that the structure we
have got is good for distribution purposes, though the Parliamentary
Beer Club would probably do quite well out of it but that would
be about it. The last element is you can tax certain goods more
heavily if they are bad in some sense; if they are bad for the
environment, bad for society or bad for the individual. That is
the reason for taxing alcohol more heavily than tap water, for
example, because I understand moderate consumption is quite good
for you but over consumption is bad for individuals, their families,
healthcare costs and all the rest of it. So the good news is for
taxing alcohol more heavily than other goods which are less bad
as it were. Having said that, why should you tax beer more heavily
than spirits or vice versa. I heard you ask whether anybody was
aware of any evidence that the form in which you take your alcohol
affects people's health differently. For what it is worth, I am
not aware of any. It is the alcohol that gets you drunk, not the
diluteness in which it is contained. That just makes you go to
the loo more often, if you want to get a certain amount of alcohol
in your system and you drink beer. So those are the three main
classical reasons why you can justify different taxes on different
goods. It does not seem that the way we tax alcohol in this country
fits particularly well into any of them. There is a good reason
for having excise duties on alcohol, which is to do with discouraging
consumption, but not a good reason for differentiating in the
way we do it at the moment.
416. Could you apply the same arguments to petrol?
(Dr Crawford) You could. Petrol is not bad actually
because, for lack of alternatives, people will still drive as
much as they need to and just pay the tax. So petrol is a very
efficient tax I would say.
417. The IFS memorandum appeared to suggest
that once cross-price effects have been taken into account, the
rate of duty on spirits is at its revenue maximising level. I
seem to have been allocated this morning questions which elicit
one-word answers so with some trepidation can I ask: has UK tax
policy on spirits been efficiently designed?
(Dr Crawford) It depends. This is what we always say,
but it does depend on what your objectives are. If your objective
is to get as much blood out of a particular stone as possible,
then it is perfect. But if you have other objectives then maybe
418. The IFS results also suggested that the
rates on beer and spirits are below the revenue maximising rate.
Has UK tax policy on beer and wine been efficiently designed?
Secondly, should the tax rate on beer and wine be increased?
(Dr Crawford) As far as design is concerned, I have
probably covered that in terms of relative levels of tax on competing
goods. As to whether it should be increased, it is a classic answer:
it depends on what you want to do. If you want to get more money
in, yes. If you want to reduce alcohol consumption amongst the
population in general, then yes. If you want to promote jobs in
brewing and wine, then no.
419. You said on wine it would be OK but if
you raised the duty it might affect employment. You have just
said getting blood out of a stone regarding spirits. So it is
very efficiently designed but does that affect employment on spirits?
(Dr Crawford) It will affect employment in spirits
through the price responsiveness of domestic markets. If you put
up the price of spirits even more, or if you put the price of
spirits up at all then you tend to reduce the demand for spirits
and that will have some employment effects in the industry. But
you also gain tax revenue. That goes on up to a point until you
get to a maximum of tax revenue. When you go beyond that point
you reduce the level of tax revenue and if you want to get as
much tax revenue as possible you are probably at the right level.
If you carry on, every penny you put on excise duties for any
goods will probably reduce its demand and that will have employment
and reduction effects. Those things are hard to look at. The purpose
of the study was not really to look at the effects on these industries;
it was to look at the effects on tax revenues.