Impact of Changes in Excise Tax Rate for Strong Alcohol on Consumption and State Revenues in Latvia

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World Academy of Science, Engineering and Technology 64 2012

Impact of Changes in Excise Tax Rate for
Strong Alcohol on Consumption and State
Revenues in Latvia
A. Strateičuks, V. Kaže, R. Škapars
Abstract—State tax revenues in most countries started to
decrease during the recession. Government of Latvia decided to compensate the decline by increasing rates of several taxes including excise tax on strong alcohol. The total increase in 2009 constituted 42% and the rate increased from 896€ to 1 266€ for 100l of absolute alcohol. Since then this has had a negative impact on consumption volumes and the split between legal and illegal market. The legal alcohol sales decreased by almost 50% (by volume), consequentially having negative effect on the State revenues from VAT and excise tax. Estimated results for 2010 are indicating 54 million € decrease in VAT, excise tax and other taxes versus 2008 (excise tax -19 million €, VAT -30 million €, other taxes -5 million €). The paper aims to analyze impact of the increase in excise tax on consumption patterns, State revenues and competitiveness of the local companies to draw up proposals for the state authorities regarding more effective tax policies. The analysis reveals a relationship between excise tax rate, illegal alcohol market and State revenues. The results can be used to improve excise tax system and effectiveness in Latvia.

Keywords—State revenues,
competitiveness, consumption.

alcohol

market,

excise

S. Cnossen has shown that harmful alcohol use is a very
important health and safety issue in the EU and suggested that earnings from excise tax should be as high as loss from the
harm caused by the alcohol [6].
The paper aims to analyze impact of the increase in excise
tax on consumption patterns, State revenues and
competitiveness of the local companies to draw up proposals
for the state authorities for more effective tax policy.
II. ALCOHOL MARKET AND CONSUMERS IN LATVIA
Alcoholic beverages represent a complex market
characterized by:
1. heavy impact of economic downturn with anticipated
recovery only starting within few years (see Table 1);
2. high impact of consumers on market development which
is typical for fast moving consumer goods (FMCG)
market with high turnover rate, hence the market is very
competitive and new product propositions are developed
and launched instantly following the changes in demand
– as any FMCG market, consumer loyalty is rather low;
3. strong alcoholic beverages are distinct from other types of drinks due to relatively much higher importance of brand
attributes and category specific consumption patterns [7].
Category and brand propensity is remarkably influenced
by consumer-related factors such as need states, lifestyles
and even sensory preferences [8]. On other hand – strong
spirits are more vulnerable to counterfeiting than specific
light ones (e.g. wine) thus posing a risk to legal market
volumes and consequentially – state tax revenues.

tax,

I. INTRODUCTION

S

CIENTISTS who are doing researches in the alcohol field
mostly focus on alcohol abuse and its problems such as
death rates, alcoholism, health and social costs of alcohol. Latest data from World Health Organization (WHO) shows
that harmful use of alcohol takes 2.5 million lives each year, 320 thousands of them are young people (15-29) resulting in
9% of all deaths in that age group [1].Elizabeth Brainerd and David M. Cutler in their research “Autopsy on an Empire:
Understanding Mortality in Russia and the Former Soviet
Union” found increase in alcohol consumption as one of the main reason of increase in mortality and decrease in life
expectancy (-6.6 years in the 5 years period from 1989 to
1994). Their estimations showed that about a quarter of the
increase in mortality (1.7 years) was the result of increase in alcohol use [2]. Similar results were achieved also by P.
Walberg, M. McKee and V. Shkolnikov in work “Economic...
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