How do you Analyze the likely vertical equity of selective excise on alcoholic beverages and tobacco products?

To analyze the likely vertical equity of selective excise on alcoholic beverages and tobacco products, consider the following factors:

Distribution of Consumption: Examine the distribution of alcohol and tobacco consumption across different income groups. If these products are consumed disproportionately by lower-income individuals, the excise tax may have a regressive impact, exacerbating income inequality. Conversely, if consumption is concentrated among higher-income groups, the tax can be more progressive.

Tax Incidence: Determine who ultimately bears the burden of the excise tax. Depending on market conditions and industry dynamics, the tax might be passed on to consumers through higher prices, absorbed by producers through reduced profits, or shared between both parties. Understanding the tax incidence helps assess the distributional effects.

Substitution Effects: Consider potential substitution effects resulting from the excise tax. For instance, if alcohol prices increase, consumers may substitute cheaper alcohol brands or switch to alternative beverages like non-alcoholic drinks. Tobacco users might seek affordable substitutes like rolling tobacco or illicit cigarettes. Analyze these substitution effects and their impact on different income groups.

Affordability: Evaluate the affordability of these products for various income levels. If the tax significantly increases the cost of alcohol and tobacco, it may disproportionately affect low-income individuals, limiting their access to these products. Assessing affordability helps determine the equity implications.

Social and Health Impacts: Consider the broader social and health consequences associated with alcohol and tobacco consumption, particularly among vulnerable populations. While excise taxes can generate revenue and discourage excessive consumption, they might also exacerbate health disparities if they limit access to products that are perceived as coping mechanisms for some individuals.

Policy Objectives: Examine the government's policy objectives behind the excise tax. If the primary goal is to reduce harmful consumption or generate revenue, the tax structure should be designed accordingly to minimize negative equity impacts while achieving desired objectives.

By analyzing these factors, policymakers can design an excise tax policy that balances vertical equity considerations with revenue generation and public health goals, ensuring that the tax burden is distributed fairly across different income groups.