The Canadian government will not raise the excise tax rate on beer to 4.7 percent in April 2024 as planned, but it will maintain the rate at 2 percent for next two years. This tax change will benefit brewers and cost the government $153 million over two years.—Bloomberg, March 10, 2024.
What is an excise tax on beer?
An excise tax on beer is a text levied on brewers and paid to the government when the beer is shipped to the beer shop. That is, the excise tax is a tax on the quantity of beer produced.
If the excise tax rise had not been cancelled, would the brewer have raised the price by the full 4.7 percent?
No! The quantity of beer demanded is determined by the demand for beer and the price of beer. If the brewer raises the price, then customers will decrease the quantity demanded and bought.
How does the excise tax influence the price of a litre of beer?
The tax doesn’t change the demand for beer, but it decreases the supply of beer, which raises the market price. Figure 1 illustrates with assumed data.
The demand for beer is the curve D and the supply of beer with no tax is the curve S. The price of price of beer is $25 per litre and the equilibrium quantity is 110 million litres per year.
With an excise tax of $2 per litre, the supply of beer decreases, and the supply curve shifts upward by the amount of the tax. Figure 1 shows the new supply of beer as the curve S + tax on brewers. The market price rises to $26 per litre and the quantity bought decreases to 100 million litres per year.
How much of the increase in the excise tax do consumers pay?
The rise in the market price refunds part of the excise tax paid by the brewer. But because the demand curve slopes downward, the brewer cannot pass all the increase in the excise tax onto the consumer. In this example, the tax is shared equally by the brewers and beer drinkers. The price paid rises by $1 per litre and the price received by brewers falls by $1 per litre.
Does an excise tax influence the efficiency of the beer market?
Yes! Payment of the excise tax is not only shared between the brewer and beer drinkers, but the tax also decreases the market equilibrium quantity of beer and creates a deadweight loss.
Figure 2 illustrates the deadweight loss that the excise tax creates.
At the quantity of beer consumed, 100 million litres, the marginal social benefit of a litre of beer is $26 and the marginal social cost of a litre of beer is $24, so $2 of total surplus is lost on this 100th million litre. Smaller amounts are lost on all quantities between 100 million and 110 million litres, and the area of the grey triangle measures the deadweight loss.
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