A Surprising Tax Preference for Beverage Alcohol

I have the habit of thinking alcohol for the tax system is like low hanging fruit – easy to find and measure, and popular to tax.  Two arguments for taxing alcohol don’t exist for most commodities:  that alcohol consumption damages innocent parties and creates a price for society to pay, and more controversial, that we need to protect people from themselves and their longings.

But the Economist of November 24 page 72 says Korea goes in a quite different direction.

Punitive tariffs prevent brewing experimentation. The Korean taxman treats malt, hops and yeast as beer ingredients, which are subject to low import duties. Anything else you might put in the brew is deemed an agricultural import, and thus a threat to the nation’s farmers. “Speciality grains like oats aren’t on the approved list, so we must pay more than 500% if we want to use them,” says Park Chul, another frustrated brewer.

http://www.economist.com/news/business/21567120-dull-duopoly-crushes-microbrewers-fiery-food-boring-beer

So there’s a tax subsidy for big brewers, who know how to disguise their interests as those of the consumer, as the old Beer Drinkers of America, an industry-funded anti-tax lobby, pointed out.

Taxing ingredients is a primitive form of alcohol taxation, as when some of the colonies taxed hops.  (Alvin Rabushka’s Taxation in Colonial America is an eye-opening pleasure.  The colonists tried most everything.)  Taxing the ingredients of competitors is pretty subtle.  Call it a relative subsidy coming through the tax system — tax scholars agree that distinguishing a subsidy from a tax is a fool’s errand.

Here’s the whole article:

Brewing in South Korea

Fiery food, boring beer

A dull duopoly crushes microbrewers

Nov 24th 2012 | SEOUL | from the print edition

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I’d kill for a real ale

THEIR cuisine is one of the world’s most exciting. South Korean diners would not tolerate bland kimchi (cabbage pickled in garlic and chili) or sannakji (fresh chopped octopus, still wriggling on the plate). So why do they swill boring beer?

Local brews such as Cass and Hite go down easily enough (which is not always true of those writhing tentacles with their little suction cups). Yet they leave little impression on the palate. Some South Korean beers skimp on barley malt, using the likes of rice in its place. Others are full of corn. And despite the recent creation of Hite Dry Finish—a step in the right direction—brewing remains just about the only useful activity at which North Korea beats the South. The North’s Taedonggang Beer, made with equipment imported from Britain, tastes surprisingly good.

In this section

Collectors, artists and lawyers

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Fallen idols

Of corner offices and cribs

Foreigners beware

         »Fiery food, boring beer

The new maker rules

Poking Walmart, choking Twinkies

Taking the long view

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The problem for South Korean boozers is that their national market is a cramped duopoly. Hite-Jinro and Oriental Brewery (OB) have nearly 100% of it. Their beers are hard to tell apart; their prices, even harder. At five out of five shops visited by The Economist, their main brands all cost precisely 1,850 won ($1.70) per 330ml can.

Until 2011, regulations required all brewers to have enough capacity to brew well over 1m litres at a time. This in effect kept all but Hite and OB from bringing foamy goodness to the masses. Smaller producers were allowed to sell their beer only on their own premises.

Today, anyone with the capacity to produce 120,000 litres can apply for a wholesale licence. This is still a lot, but there are short cuts. One brewer says the loose wording of the law means some have bought gigantic but shoddy old vats to make up the difference, and simply left them unused.

However, only a handful of small brewers have risen to the challenge. One of them, Craftworks Brewing Company, is owned by a Canadian, Dan Vroon. Mr Vroon’s pub in Seoul is packed every night. But several hurdles still make it hard for him to sell his pilsners, stouts and pale ales more widely, he says.

Brewers are taxed heavily if they deliver their own beer. Craftworks’ unpasteurised brews must be kept chilled from the vat to the tap, which creates a problem. Cold distribution is a tiny, pricey niche. This is because the big boys don’t use it: their beers have their tasty, bureaucrat-bothering bacteria removed at the brewery. They can thus be delivered warm and then chilled in the pub.

Punitive tariffs prevent brewing experimentation. The Korean taxman treats malt, hops and yeast as beer ingredients, which are subject to low import duties. Anything else you might put in the brew is deemed an agricultural import, and thus a threat to the nation’s farmers. “Speciality grains like oats aren’t on the approved list, so we must pay more than 500% if we want to use them,” says Park Chul, another frustrated brewer.

Those who do not qualify for a wholesale licence have it even worse. Though they sell only through their own pubs, government inspectors place meters on their vats. These can become contaminated, causing costly stoppages. “It’s enough to drive you to drink,” sighs Mr Vroon.

from the print edition | Business

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Author: patoglesby

From 1982 to 1990, I worked in tax policy for Committees of the United States Congress. In recent years, I was Adjunct Lecturer at UNC-Chapel Hill's Business School and then Adjunct Professor at its Law School.

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