Diluting the spirits is one of the oldest con games that bars use to increase their profit and deceive customers. Todays mixed drinks with sweet mixers, spicy mixers, and mixed liquors are ripe targets for diluted liquor.
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Adding water to wine / spirits will not reduce the alcohol content. It will decrease the Alcohol By Volume (ABV%), because the volume increases and the actual alcohol content remains the same.
Adding water dilutes the alcohol, which reduces the burn and allows other properties to reveal themselves. But there's also something significant happening on a molecular level. Aroma molecules share more chemical likenesses with alcohol than they do with water. As such, they tend to bind with alcohol.
Of course. It all depends how much alcohol you're taking in. The absorption rate will vary depending on concentration, but you'll get drunk on it if you have enough. (If you're mixing like 1 part vodka to 20 parts water or some other heavy dilution, you may not be able to drink enough to feel much effect.)