The Chancellor of the Exchequer

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The Chancellor of the Exchequer proposes an increase in taxation of alcoholic spirits, except beer and wine by 2%. A number of protests are made from various groups, amongst which a group of local representatives from Scotland arguing that Scotland is exempt of the tax. They approach you for an informed opinion. Write a 1500 word essay analyzing the impact on the groups likely to be affected and whether you think the representatives have a strong case. Tax is a useful policy instrument used by a government and affects people’s lives in many ways.

This devise for the government is an efficient way to raise revenue. (David Begg, 1994. ) This tax proposal put forward by the Chancellor of the Exchequer is a normative statement, prescribing a tax increase of 2% on alcoholic spirits. Controversy is expected with this proposal and this taxation is already being questioned by some Scottish people. This proposal would have a great impact on the nation especially since it is taxing a good that is sells so well in the country.

Many different sectors of society are affected by this proposal, therefore I must analyse what the effects of a 2% tax increase proposal considering all the varying sectors of society. Primarily, it is clear from this proposal that a 2% tax increase will definitely affect the alcoholic spirits market immensely. Consequently, this taxation will have an impact on the beer and wine market too as they are not being taxed. Changes in markets tend to have a domino effect on other markets especially when the products have a relationship like beer, wine and spirits.

Now I must assess the possible losses and gains for these markets in light of the proposal. Alcohol is seen by a consumer as a luxury good because it is not actually something that is necessary for the consumer to purchase. Therefore this means that there is an elastic demand for alcoholic spirits making it a product very responsive to price changes. (N. Gregory Mankiw, 2002. ) The demand for alcoholic spirits is illustrated in graph 1 (D. ) This curve is quite sloped as the demand is more elastic.

It is evident that when the price of alcoholic spirits is low the quantity of spirits being sold is higher. Two supply curves are illustrated in the graph. The s curve displays the supply of alcoholic spirits before a tax increase. The curve shifts upwards to s+t whenever a 2% tax increase is imposed. From this graph I can now examine who pays more tax. The red shading shows the producer surplus and the blue shading is the customer surplus. When classifying alcoholic spirits as having an elastic demand the consumer benefits as the firm has to pay much more tax on the alcohol.

The tax burden has fallen on the producer. This in turn explains why indirect taxes usually are not levied on goods with elastic demand, this is not worthwhile for the government as it will not have a notable tax revenue. (www. bized. ac. uk/virtual/economy/policy/tools/vat/vatth3. htm) If alcoholic spirits have an elastic demand and tax is increased by 2% then this is going to also have a knock-on effect on other markets. Wines and beers are exempt from this tax increase therefore it would be expected to see an increase in the sales of wines and spirits.

If the consumers wish to buy alcoholic substances they would probably opt for a cheaper option to taxed wines and spirits as substitute goods. Next I will investigate the other side of the argument as to how inelastic alcoholic spirits and what extent are beer and wine good substitutes. On the other hand it could be argued that alcoholic spirits are a product with an inelastic demand. Perhaps this could be seen a as more realistic definition. The price of alcohol has substantially increased in price throughout the years. This however has not affected the producer’s sales dramatically as illustrated in the following chart.

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