Alcohol tax increases shift purchases to Estonia

Confidence: Medium

On by default

Shape: Threshold

A small increase raises revenue almost fully, but with a larger increase more people buy their alcohol in Estonia, and part of the extra revenue is lost.

Of every 100 euros that a change to “Alcohol excise” saves or brings in, 50 € is lost as revenue on the line “Alcohol excise” for the part of the lever change beyond 10%. (The other way round if the change adds spending or cuts taxes.)

E(t) = s × T(t) × max(0, 1 − threshold / |lever change|)

The direction is well documented from the 2004 experience; the threshold and share are estimates.

Sources: THL blog: Cheap alcohol would collapse alcohol tax revenue (revenue, traveller imports and the 2004 cut; in Finnish)

How the effect builds up over time

Share of the change's own effect on the balance, year by year. A threshold effect depends on the size of the change; the chart shows a change twice the threshold. With the default values.

You can switch the effect on or off and adjust its assumptions in the simulator under Cause-and-effect chains.