Journal of Economics and Political Economy www.kspjournals.org Volume 3 September 2016 Issue 3 How Efficient are the Current U.S. Beer Taxes? By Vinish SHRESTHA †aa Abstract. This paper examines the status of current beer taxes in the U.S. by questioning how far away the present beer taxes are from the optimal taxes. Following the estimation of tax elasticity, I estimate the lifetime discounted costs that a heavy drinker levies on others through: 1) Years of life lost; 2) Social insurance system; 3) Drunk driving accidents; and 4) Forgone income taxes. The optimal level of beer tax ranges from 17.15 percent to 47.5 percent of the price per drink. Even the conservative estimates suggest that current beer taxes comprise only 16 percent of the external costs. Keywords. Externality, Beer Taxation, Efficiency. JEL. H21, H23, I10. 1. Introduction ederal alcohol taxes have not been raised since 1991 and since then only a handful of states have opted for state-level increases in alcohol taxes. The real prices and taxes for beer have plummeted over recent decades. Although past studies suggest that moderate and light drinking can be beneficial to health, alcohol-related tragedies such as drunk driving, crime, and liver cirrhosis are well documented. From a Pigovian viewpoint, alcohol taxes can be used as a medium to cover not just the internal, but also the external costs of alcohol consumption. The lack of initiative shown by policymakers to raise alcohol taxes leads one to question the current status and role of alcohol taxes in the United States. There are two main reasons that may explain a policymaker’s reluctant attitude towards raising alcohol taxes. The first one is the lobbying power established by the beer companies. The second one can possibly be attributed to political convenience. Greenfield et al. (2007) suggest that drinking sentiments have increased in past decades. Higher alcohol taxes would not only increase prices for heavy drinkers but also for light and moderate drinkers, who constitute a majority of the population. Hence, increasing alcohol taxes may lead to additional political costs than, for example, a tax increase in cigarettes. From an economic perspective, the failure to adequately tax alcohol may promote behaviors that lead to inefficient decisions. Although the needs for alcohol taxes are clear, how well the current level of alcohol taxes perform in addressing the external costs associated with heavy drinking is theoretically ambiguous. Given that heavy drinking leads to higher medical costs, these costs may be borne by the social insurance systems, such as Medicaid and Medicare. However, if heavy drinking leads to premature death, heavy drinkers may cross- aa † Department of Economics, Towson University, Stephens Hall, Room 101B, Towson, MD 21252, USA. . 410 704 2956 . vshrestha@towson.edu F