Alcohol Excise Duties in an Inflationary Environment: An Econometric Study of the Real Erosion and Demand Responses in Sweden

Sammanfattning

Alcohol consumption generates substantial societal costs, which in theory can be corrected with Pigouvian taxation. The Swedish system for alcohol taxation is built upon nominal rates which must be corrected manually by the government. Concerns have been raised in the last two decades due to high levels of inflation, which can negatively affect the corrective power of the excise duty. This thesis examines how and if the alcohol tax has been eroded in real terms between 2006-2025. Utilizing quarterly sales data of Systembolaget, the Swedish retail monopoly, combined with CPI-levels, we estimate log-log demand specifications for beer, wine, cider and spirits, comparing nominal and CPI-deflated tax rates. Because of the institutional structure of Systembolaget and its mechanical mark-up of the tax rate, the change in the excise duty can plausibly be treated as exogenous price variation. The results of the specifications show that the nominal model yields substantially larger coefficients along with larger significance compared to the real specification, which exhibited smaller estimates along with decreasing significance. Robustness checks were conducted across different specifications which exhibited the same pattern as in the full models. The absence of significant results in three out of four real specifications prevents causal claims of the tax elasticity. However, the findings are consistent with the concerns that inflation has eroded the excise duty’s corrective power in Sweden. The policy recommendation is to follow the same system of CPI-indexation of the tax rate, as implemented in Norway.