Impact of Taxation Policy on Household Spirit Consumption and Public-Finance Sustainability

Tanja Laković, Ana Mugoša, Mirjana Čizmović and Gordana Radojević
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Tanja Laković: Faculty of Economics, University of Montenegro, 81000 Podgorica, Montenegro
Ana Mugoša: Faculty of Economics, University of Montenegro, 81000 Podgorica, Montenegro
Mirjana Čizmović: Faculty of Economics and Business, Mediterranean University, 81000 Podgorica, Montenegro
Gordana Radojević: Faculty of International Economics, Finance and Business, University of Donja Gorica, 81000 Podgorica, Montenegro

Sustainability, 2019, vol. 11, issue 20, 1-15

Abstract: The objective of this study was to estimate the sensitivity of spirit quantity demanded for price and income changes in Montenegro and to show the effectiveness of taxation-policy changes in the reduction of spirit consumption. It is the first study on this topic in Montenegro, where adverse effects of alcohol are recognized as an important obstacle in achieving Sustainable Development Goals (SDGs). The price elasticity of spirits was estimated using Deaton’s methodology on the Household Budget Survey (HBS) data in the period of 2006–2017. Cigarettes were included as a control variable as, along with spirits, they are one of the most harmful substances used in Montenegro. Using these results, we simulated the effects of spirit use on public revenue. The results show that the spirits’ own price elasticity equaled −0.45, while the cross-price elasticity equaled −0.17, showing that spirits and cigarettes are complementary goods. These results, along with elasticities calculated by sex (male, −0.55; female, −0.5), income groups (low income, −1.16; middle-income, −0.46; high-income, −0.26), and for the working-age group (−0.74), demonstrate that an increase in excise taxes could be a very efficient tool in decreasing the adverse effect of spirits and cigarettes on household member’s productivity, health, and budget, which is in line with SDGs. An efficient road map for sustainable development for Montenegro must include the reduction of health-harmful substance use through excise tax increase.

Keywords: price elasticity; income elasticity; taxation policy; HBS; SDGs; public revenue; Montenegro (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:gam:jsusta:v:11:y:2019:i:20:p:5858-:d:279033

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