Our story starts in Russia during the sixteenth century when vodka probably entered the Russian diet. It ends now with alcohol addiction a big problem for individuals and for the Russian government.
Where are we going? To sin taxes and inelastic demand.
The Importance of Vodka Money
The Russian government has been addicted to vodka money. It all began centuries ago when Ivan IV established government controlled taverns called kabaks. Spreading across Russia, the kabaks became the only taverns in town when the competition was outlawed. A source of monopoly and tax revenue by the 1800s, vodka sales might have been creating a superpower by generating at least one-third of all government revenue.
Surely trying to maximize revenue, Peter the Great proclaimed that a wife should be whipped if she took her husband home from a tavern prematurely. Catherine II later commented (we think) that a drunken people were easier to rule.
Fast forwarding to the 20th century, first Vladimir Lenin prohibited vodka and then Stalin reversed the policy because he needed the money for industrialization. Again recognizing the impact of inebriation on productivity, life expectancy and family life, in 1985, Mikhail Gorbachev initiated an anti-drinking campaign that was condemned in this Soviet joke:
“There was this long line for vodka, and one poor guy couldn’t stand it any longer: ‘I’m going to the Kremlin, to kill Gorbachev,’ he said. An hour later, he came back. The line was still there, and everyone asked him, ‘Did you kill him?’ ‘Kill him?!’ he responded. ‘The line for that’s even longer than this one!’”
As recently as 2010, the Russian finance minister said Russia state coffers need people to smoke and drink more.
The Bottom Line
Napoleon III summarized the sin tax dilemma when, urged to forbid smoking, he said “This vice brings in one hundred million francs in taxes every year. I will certainly forbid it at once–as soon as you can name a virtue that brings in as much revenue.” As Napoleon implies, demand for vodka, cigarettes and sugary drinks tends to be less sensitive to price hikes. Called inelastic, the quantity demanded minimally sinks when a tax or monopoly pricing elevates the cost.