Select Committee on Scottish Affairs Minutes of Evidence

Examination of Witness (Questions 410 - 419)




  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 specific issues.

  411. Do you receive any grants from the drinks industry?

  (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 case—what 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 alcohol—beer, wines and spirits—have 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.

Mr Welsh

  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 not.

Mr Tynan

  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.

Mr Welsh

  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.

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