Captain Morgan Raids Tax Rebates

November 30, 2009

Comments Regarding Proposed Amendment to Definition of Candy

The federal government currently charges an excise tax of $13.50 per proof gallon of rum. However, the government rebates part of this tax revenue back to two territories, Puerto Rico and the Virgin Islands. This rebated revenue is now at the center of a dispute between the two territories.

Last year, the Virgin Islands agreed to build a new factory through a public-private partnership with Diageo, the producers of Captain Morgan. The funds for the new project come from the rebated revenue. Puerto Rico,where the current plant resides, is attempting to block this funding by placing caps on the amount that can be reinvested into the industry.

It’s difficult to know where to begin a critique of such a policy. The excise tax on alcohol is most often justified as a moral argument against the personal ills of overconsumption (i.e. health effects) and costs to others (i.e. drunk driving). Thus the tax acts as a deterrent. This logic breaks down when the taxes go back into subsidizing the same product. We could then hope that this policy would be a net wash. The consumer is taxed, but that tax just ends up as a subsidy that lowers the cost of production. Thus, it would be a zero sum game of taxes and subsidies. This is not the case however. Both Puerto Rico and the Virgin Islands have engaged lobbyists who will eat away the value of this subsidy. This type of rent seeking competition actually creates a negative sum game as both territories use the political process to attract and retain business.

It’s seems as if Puerto Rico and the Virgin Islands have taken a lesson from Captain Morgan’s book and decided to raid the taxpayers’ wallets.


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