International report warns of diminishing returns on alcohol tax

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If duty rises imposed on alcohol become too large, the policy of using alcohol taxation to close fiscal deficits by Governments across Western Europe poses the risk of reducing consumption to such an extent that tax revenues actually fall, particularly if the economic backdrop is weak, according to a recent report from Business Monitor International which provides an Industry Trend Analysis on targeting alcohol for tax revenue.



20 March 2012

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The report cites Ireland as an example where tax revenues have fallen from €1.1 billion in 2007 to €800 million in 2010 “after the government imposed significant duty rises at the same time as the country was hit by a fierce recession. As a recognition that these rises have been counterproductive (in terms of raising revenues) Ireland has recently cut duties across the alcohol sector, it reports.

“This analysis would suggest that governments looking to increase tax revenues should actually cut excise duties.”

However Business Monitor International points out that in Ireland alcohol duties are already very high and make up a significant portion of the total price paid by the consumer which would suggest that duty changes here would have a more pronounced effect on consumption than in Continental Europe.

“This is compounded by the ease with which Irish consumers can make cross-border shopping trips to the UK and means we see plenty of scope for further rises in cash0-strapped parts of Europe, with a very real possibility of additional inflation-busting increases in Spain, Greece and Italy.”



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