Indrek Saar successfully defended his PhD dissertation

Indrek Saar successfully defended his Ph.D thesis

Optimal alcohol taxation in Estonia

on November 25, 2011

Supervisor: Associate Professor Viktor Trasberg (Ph.D), University of Tartu

Opponents: Professor Alari Purju (Ph.D), Tallinn University of Technology, Tuomas Kosonen (PhD), Government Institute for Economic Research, Finland The aim of the thesis was to analyze the principles of alcohol taxation and to give a numerical estimate for optimal taxation level in Estonia. The intention was to account for both alcohol-related harm as well as fiscal effects of tax policy. In order to estimate the optimal policy, the mathematical model was built based on the well-known Pigouvian and Ramsey taxation principles from the optimal taxation literature. The following assumption were made in the model: to implement the desired tax policy government needs more resources to deal with the potential expansion of illegal market, tourists` alcohol purchases represent considerable proportion of local market, government keeps its budget balanced by using the positive fiscal impacts of alcohol taxation to reduce labor taxes or increase public medical spending. For empirical application of the model two empirical studies were carried out to analyze alcohol-related traffic harm and to estimate the social costs of alcohol in Estonia. The remaining empirical evidence required for the derivation of optimal taxation level was obtained from prior studies conducted in Estonia or elsewhere. It was shown that optimal taxation level exceeds the level prevailing in 2009 by 50%-200%. Even under the assumption that approximately half of the tax-induced reduction in alcohol consumption is offset by the increase in consumption of alcohol acquired via illegal or border trade, the optimal taxation level turned out to be more than 50% higher than prevailing rate. Relatively high optimal level arises mainly from policy effects through the budget system. This basically implies that it would be more efficient to collect somewhat more fiscal revenues from alcohol taxation and less from labor taxation. In order to increase the applicability of the results into practice, the future empirical research should specify the effects of alcohol taxation.