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HM Revenue and Customs Working Paper 10: Econometric Analysis of Alcohol Consumption in the UK
In the tax year 2009 to 2010 the UK government generated £9 billion in receipts from alcohol duties, around 2% of the government’s total revenue from taxation. Receipts are fairly evenly split between beer (£3.2 billion), wine (£2.9 billion) and spirits (£2.6 billion). Cider has traditionally been a small component of total duty receipts (£300 million).
The main objective of this study is to estimate the price elasticity of demand for alcohols in the UK. HM Revenue and Customs uses these price elasticities within its alcohol costings model. The purpose of this model is to determine the impact on receipts from changes in the duty rates. It does this by determining the impact of the duty rate change on product prices and the resulting behavioural reaction from consumers. A duty increase will of course mean greater tax revenue for each unit that is sold. However, being a normal good, consumers will typically respond to a price rise by lowering their unit demand. The overall effect on tax revenue will be determined by the sum of these two opposing effects.