July 6, 2010

Trade, Taxes, and Terroir

  • Noel D. Johnson

    Senior Research Fellow
  • John Nye

    Frederic Bastiat Chair in Political Economy, Mercatus Center
  • Raphael Franck

Key materials

This paper uses data on the wine market in France at the turn of the twentieth century to argue that excise taxes collected on quantity can also be protectionist. High internal tax rates generated Alchian-Allen effects that biased consumption and production towards local producers who sold higher priced wine. This hypothesis is tested by using quasi-experimental variation in local taxes generated by a policy change in 1901. The experiment shows that when regions were forced to lower their wine taxes by the national government, more producers went out of business in departments that lowered their taxes more. It also shows that the amount of wine transacted on formal markets, as opposed to being consumed “on the farm”, increased in regions which lowered their taxes more. Furthermore, consistent with the predictions of the Alchian-Allen theorem, these effects were larger in departments which initially produced higher priced wine. The test concludes that unit costs, even if they do not discriminate on the point of origin of a product, may generate significant barriers to market integration.