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Wine Taxes, Production, Aging and Quality*

Published online by Cambridge University Press:  08 June 2012

Rachael E. Goodhue ,
Jeffrey T. LaFrance  and
Leo K. Simon
Rachael E. Goodhue
Affiliation:
Department of Agricultural and Resource Economics, University of California, Davis, CA 95616 and Giannini Foundation of Agricultural Economics, email: goodhue@primal.ucdavis.edu
Jeffrey T. LaFrance
Affiliation:
School of Economic Sciences, Washington State University, Pullman, WA 99164–6210, email: jtlafrance@wsu.edu
Leo K. Simon
Affiliation:
Department of Agricultural and Resource Economics, University of California, Berkeley, CA 94720–3310 and Giannini Foundation of Agricultural Economics, email: simon@are.berkeley.edu
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Abstract

We consider the impact of taxes on the quantity and quality produced by a competitive firm of goods, such as wine, for which market value accrues with age. Our analysis found the following: an increase in the volumetric retail tax collected at sale increases quality, so that the basic Alchian-Allen effect holds. However, an increase in the volumetric storage tax collected each period decreases quality, as does an increase in the ad valorem storage tax. The effect of an increase in the ad valorem retail tax on quality is indeterminate. Increases in any of the four taxes reduce the quantity of wine produced. Any two-tax system that includes a volumetric sales tax spans the full range of feasible tax revenues with positive tax rates. For any tax system that reduces quality relative to the firm's no-tax equilibrium, there is another tax system that increases tax revenues, eliminates the quality distortion, and does not increase the quantity distortion. Many wine industry observers believe that most, if not all, existing tax systems tend to result in the suboptimal provision of quality. Our results suggest that the wide variety of wine tax systems is not prima facie evidence that these systems, or most of them, are inefficient. Provided the system includes a volumetric sales tax it may be efficient, regardless of which of the other instruments, or how many of them, are used. Assertions regarding inefficiency must be evaluated on an empirical case-by-case basis. Our analysis provides a theoretical framework for such research. (JEL Classification: D2, H2, Q1)

Type
Articles
Information
Journal of Wine Economics , Volume 4 , Issue 1 , Spring 2009 , pp. 27 - 45
Copyright
Copyright © American Association of Wine Economists 2009

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