For anyone who has ever travelled overseas, have you ever wondered why alcohol seems to be so much cheaper than it does in Australia? For example, in most of Europe and the US, you can easily pickup a good bottle of vodka for under $20, which pales in comparison to the $65 plus you need to pay for a decent bottle of vodka in Australia. How can there be such a big discrepancy in pricing across countries?

The answer lies in the alcohol tax rates adopted by individual countries. Taking 2022 as a benchmark (the year for which comparative international data is most readily available), tax on alcoholic spirits in Australia amounted to $88.91 per litre of ethanol [1]. This translates into $24.89 of tax per 700ml spirit bottle, where the final alcohol concentration is 40% (see Box 1 below for the worked calculation). Most Australian gin and Australian vodka have a final alcohol concentration of 40%, so this is a reasonably good benchmark to work off.

Alcohol concentration in 700mL vodka bottle = 0.7 L * 40% = 0.28 L

$88.91 per litre * 0.28 L = $24.89 

Calculation 1: excise duty based on rates at January 2022

To provide a point of comparison, aside from Iceland and Norway, Australia has the highest alcohol tax rates among OECD (Organisation for Economic and Co-Operation and Development) countries.

Table 1. Excise duty for spirits among selected OECD nations as of January 2022 [1]. AUD amount is indicative and based on December 2022 exchange rate

In Australia, and many other countries the tax on spirits is calculated differently to tax on beer and wine. Spirits tax is known as excise duty and as of December 2022, this rate was $94.41 per litre of alcohol [2]. The rate is reviewed and adjusted twice per year. As a result, Australian distilleries are faced with a huge tax burden, helping to explain why you’re unlikely to find a craft distillery selling their spirits for less than $50 per bottle.

Interestingly, recent work by researchers from the US have revealed that the tax pass through rate for excise duty, or the extent to which tax hikes are passed onto consumers differs wildly depending on the product. They found that tax increases led to the price of cognac, Scotch whisky and Cointreau being increased above and beyond the price increase. In contrast, the price of gin did not rise by as much as the tax increase. In other words, the tax is under shifted on gin products, but over shifted on other spirits [3].

While it’s difficult to generalise from this piece of work, it does highlight that perhaps gin is less amenable to price increases owing to tax rate changes. One potential explanation is the highly competitive nature of the Australian gin market and the tendency for consumers to shop within a given price segment [4]. Price increases may push a product into another category where it is ill-suited to compete. Take Boobialla gin as an example. It retails below the $100 mark, which can act as a mental threshold for many shoppers. Breaching the $100 mark would deter many would be consumers, meaning that as the tax rate increases, it is unlikely that the price point for Boobialla will budge.

Economists and public health officials will often proffer the need to adopt sin taxes as a way to discourage consumption [5]. These taxes also offer a lucrative revenue stream for the federal government, so it’s unlikely we’ll ever see wholesale changes to this policy stance. Nevertheless, if you ever lament the fact that alcohol prices are so high, spare a thought for the people of Iceland. The tax on a bottle of 40% vodka equates to 4,556 Icelandic Krona (or about AU$47)!

References

[1] https://www.oecd.org/ctp/consumption-tax-trends-19990979.htm

[2] https://www.ato.gov.au/Business/Excise-and-excise-equivalent-goods/Alcohol-excise/Excise-rates-for-alcohol/

[3] Shang, C., Ngo, A., & Chaloupka, FJ. (2020), The pass‑through of alcohol excise taxes to prices in OECD countries. The European Journal of Health Economics. https://doi.org/10.1007/s10198-020-01177-w

[4]   Pedeliento, G., Andreini, D., & Dalli, D. (2019). From Mother’s Ruin to Ginaissance: Emergence, settlement and resettlement of the gin category. Organization Studies. https://doi.org/10.1177/0170840619883366

[5] Wright, A., Smith, K. E., & Hellowell, M. (2017). Policy lessons from health taxes: a systematic review of empirical studies. BMC public health, 17(1), 583. https://doi.org/10.1186/s12889-017-4497-z

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