Department of Agricultural and Resource Economics

We consider the impact of taxes on the quantity and quality produced of goods whose market values accrue with age. The analysis is motivated by the high and increasing taxation rates in the wine industry across the globe. If society values both quality and quantity as goods, an optimal tax system would never reduce the quality marketed, though it necessarily reduces quantity. Any two-tax system that includes a volumetric sales tax and any one of three other types of tax - an ad valorem sales tax, an ad valorem storage tax, or a volumetric storage tax - spans the quality/revenue space and can support an optimal tax system. Any tax system that reduces quality relative to the market equilibrium with no taxes could increase tax revenues and reduce the quality distortion without increasing the quantity distortion. Given this, the only explanation for taxation schemes that reduce both the quantity and quality of goods like wine must be a Calvinistic social welfare function.