Drink No Wine Before Its Time

We consider the impact of taxes on the quantity and quality produced of goods, such as wine, for which market value accrues with age. Any pair of taxes 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. Provided society positively values both quality and quantity, any optimal tax system will deliver the optimal level of product quality, and a sub-optimal quantity. That is, for any tax system that reduces quality relative to the market equilibrium with no taxes, there is another that increases tax revenues and reduces the quality distortion without increasing the quantity distortion. .