Economic models that take into account a range of social consequences related to alcohol consumption indicate that raising U.S. federal and state taxes on alcohol, in order to generate additional government revenue, would benefit society in several areas of economic significance.

Most discussions in health economics regarding alcohol tax levels focus on externalities, social outcomes that affect individuals not immediately involved in the buying and selling of alcoholic beverages. This article focuses on the purely fiscal component of the alcohol tax and its capacity to bring about general welfare gains. The authors build an optimal alcohol tax model that includes the externality (Pigouvian) function, but also contains a “productivity effect” that accounts for per-unit reductions in alcohol. They subsequently combine a range of demand elasticities for alcohol itself with alcohol/leisure cross-price elasticities to derive the fiscal component of the optimal alcohol tax.

Key Findings: 

• The optimal alcohol tax is six to 10 times the level of the current tax. 
• Optimizing the alcohol tax would reduce alcohol consumption up to 38 percent, increase government revenue up to $61 billion, and create general welfare gains.

The substance of this report requires a familiarity with basic microeconomic and macroeconomic principles.