Volumetric Tax Penalties

Week 6 — The Other Design

Photo: Michael Gaylard, CC BY 4.0, via Wikimedia Commons.

Where we left off

  • Week 4: a tax on value, and a forty-fold gap in burden per drink
  • the gap was structural, not a drafting error
  • so the remedy has to be structural too
  • this week: the design that does it, and its bill

Volumetric excise removes the arbitrage entirely. It does so by making every litre of alcohol cost the same in tax, which is both the point and the complaint.

— Volumetric Excise and the Distilled Spirits Premium (Australian Tax Policy Journal, 2020)

Learning objectives

By the end of this lecture you should be able to:

  • state the volumetric base and compute litres of pure alcohol
  • calculate excise payable for a product
  • show why the per-standard-drink burden is flat under this design
  • state the spirits premium as a number you derived

The base

Dollars per litre of pure alcohol. Not per unit, not per dollar.

litres_of_alcohol = (volume_ml × abv_percent) / 100000
excise = litres_of_alcohol × rate_per_lal

Price does not appear anywhere in that calculation. That is the whole difference from week 4.

Three products, one rate

At an indicative $104.00 per litre of pure alcohol:

ProductLALsExcisePer standard drink
Spirit, 700 mL, 40%0.280$29.12131.8c
Beer, 375 mL, 4.8%0.018$1.87131.8c
RTD, 375 mL, 4.5%0.017$1.76131.8c

Identical. To the tenth of a cent.

Why it must come out flat

  • the tax base is litres of pure alcohol
  • a standard drink is a fixed mass of pure alcohol
  • so tax per standard drink is the rate times a constant
  • the flatness is arithmetic, not policy design succeeding

Compare week 4, where the same exercise produced 1.8c against 72.6c.

The bill: the spirits premium

Closing the arbitrage is not free.

  • that flat 131.8c sits well above wine’s effective burden under WET
  • spirits therefore carry a markedly heavier per-drink tax than wine
  • the reading calls this the spirits premium
  • it is the price of removing the cheap-product loophole, paid by one category

Which regime is a bottle under?

You cannot tell from the shelf price. You can only tell by decomposing:

  • production cost (week 1)
  • packaging and freight (week 3)
  • category tax (weeks 4 and 6)
  • margin, by difference

Same decomposition, applied category by category. That is the method.

Common errors

  • dividing by 1000 rather than 100000 when computing LALs
  • quoting the reading’s premium figure instead of deriving your own
  • reading “flat per standard drink” as “fair” — the lecture claims the first and not the second
  • assuming one regime is simply better; each buys something and charges for it

Where this connects

  • the WET Policy Brief is due next week and wants this comparison
  • the week 6 lab puts all seven of your products on one axis
  • the toolkit’s tax comparator runs both regimes on one product, which is the fastest way to check your own working

Next week

Where the product sits in the shop — and what that position costs the person who walks to it.