The Impact of Converting Ad－valorem Tax to Specific Tax in the Liquor Tax on The External Effects
Asian Tax Journal Vol. 19 No. 2 (2018), pp. 63-87
Abstract
This study examined the difference between ad valorem tax and specific tax based on taxation theory. We also analyzed the effects of current ad valorem tax to specific tax on alcoholic beverage prices, consumption and tax revenue. This study focuses on the external effects and aims to present the policy direction of liquor tax, The results of the study are as follows. First, when converting from an ad valorem tax to a specific tax, lower prices of alcoholic beverages are predicted to increase in price and decrease in consumption. In domestic alcoholic beverages consumption, the proportion of low－priced alcoholic beverages is large and the proportion of high－ priced alcoholic beverages is small, so total alcohol consumption is expected to decrease and social costs can be expected to decrease. Second, the change of consumption by proportional specific tax showed that soju decreased in the range of 31.2～57.4%, whiskey increased in the range of 78.2～ 178.3%. Total alcohol consumption decreased by 7.3～30.6% and tax revenue decreased by 14.0～ 35.7%. Applying a progressive specific tax, to minimize the impact on the domestic liquor industry and tax revenue and to improve the correcting effect of external diseconomy, the total alcohol consumption decreased by 14.7～22.4%, the tax revenue decreased by 14.3% or increased by 2.4%, the consumption of soju decreased by 37.3～48.7%. As a result, the progressive specific tax has a lower decrease in the tax revenue and a smaller decrease in the consumption of soju compared to the proportional specific tax. Third, since conversion of liquor tax to specific tax can impact on the soju industry, it is introduced as a mixture of ad valorem tax and specific tax rather than complete conversion, so that the proportion of specific tax is increased over 5 to 10 years and the tax rate is gradually increased to minimize impact on liquor industry. In addition, the government should support the domestic liquor industry in order to secure its competitiveness. This study is significant in that it focuses on the impact on external effects and proposes a long －term policy of liquor tax based on the analysis of the effects of converting liquor tax into specific tax.
Keywords
- liquor tax
- ad valorem tax
- specific tax
- external effects
- external diseconomy
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