Alcopops Tax Refund - A Net Gain to Producers??

Does the defeat of the Alcopops tax legislation by Family First's Steve Fielding and the Government's refusal to vote with the opposition's legislation to keep the revenue lead to a profit for the distillers?

Using a D & S diagram shown right and Economics 101 to examine this question yields an interesting overall answer. Initially, in the market for pre-mixed drinks shown right the equilibrium price would be Pe and quantity sold Qe.

Once the tax is announced the price paid by consumers at the bottle shop increases to Pc. For the market to clear, there must be a new lower equilibrium quantity Qt (the diagram is not to scale and for illustrative purposes only, but it is certain that there will have been a reduction in the quantity of pre-mixed drinks consumed in Australia although the magnitude of this is still uncertain) the effective price received by producers is lower now at Pp. The imposition of a tax effectively places a wedge between Pc and Pp equal to the amount of the tax. This is an important element which is sometimes overlooked: the burden of a tax is SHARED between producers and consumers regardless of who it is levied upon (this is not necessarily equal or 'fair').

Fast forward to the present and the Government has raised $300m from the increase in the tax on alcopops (this is equivalent to the amount of tax per unit times the quantity sold or shown diagramatically by the area (Pc - Pp) x Qt which it will now return to distillers. This transfer is equivalent to the distillers having sold Qt units at Pc for the entire year. This leads to a higher overall Producer Surplus (or profit) for distillers than if the tax had not been imposed. So a distortionary tax and transfer to the producers leads to them effectively winning out at the expense of consumers.

There is no compensation being given to consumers even though they have paid unnecessarily higher prices (and no real practical solution to doing so). This fact has not been mentioned in the media and obviously there are many more complicating factors than the simplified model that has just been analysed (intermediaries, price elasticities etc) but the economic effects remain. This makes it a very astute manouver for the alcopop manufacturers to donate the return tax proceeds to alcohol education groups and voluntarily take up warning labelling initiatives in the failed package, so they are not seen as profiteering.

Rudd has failed to gain passage after a full 12 months of political incovenience and there will be substantial effects on the budget forecasts. He is unable to attack the opposition on forcing the budget into deficit as $1.2 billion looks miniscule next to a $42 billion stimulus package, he is only playing the health arguments which are currently unable to be substantiated.

It is interesting although not surprising that the coalition was the recipient of substantially more recent donations from alcohol industry lobby groups. The opposition does however have a strong argument that this was nothing more than a tax grab by the Gov disguised as social policy, even if the tax itself was only closing a Costello loophole and bringing the tax on alcopops in proportion to that currently on spirits.

Perhaps all this is why there seems to be no winners and losers in this whole debate. All this over advertising of alcohol during sports TV broadcasts during the day and less than 2% of the primary vote - Fielding sure knows how to stick to his guns.