Beer Tax Increased-What Would Be The Impact Of Taxes.?

Question

Any opinions or help would be greatly appreciated. Thanks!

Say the U.S. government is raising exercise tax on beer. As a result the price of beer increases. What do you think the impact of taxes in terms of substitution and income effect be? Consider the consumers’ purchasing power is restored to pre tax level by returning consumers the revenue raised through tax. Will this make the consumer consume the same amount of beer as before the tax? Why or why not?

Answer 1

When you raise the cost of most things, whether by tax or not, less will be purchased.  

Answer 2

I believe what you are saying is that if you pay an extra dollar in beer tax and the government returns that dollar you could still buy the same amount of beer.

When the government takes a dollar from you and refunds it in some way, there is an administrative cost to the government for handling the collection and disbursement, so you would be lucky to get back 50¢ from the dollar tax you paid.

So don't tax my beer.  Just let me keep the dollar and save the government the expense of collecting and disbursing it.

I'll drink to that.

Answer 3

Unless the tax increase was huge, the effect on sales would not be great.  In economic terms, the demand curve for beer is pretty inelastic. Maybe more people would make home brew.

Answer 4

It would depend of course on how much the tax was.  For a small amount I'd guess it wouldn't make a lot of difference in consumption.