Two kinds of tax, and a history from 1909 to 2020

These notes are a presentation script on a then-recent issue, the reform of Korea’s liquor tax. A liquor tax, the speaker says, is a tax on alcoholic drinks and a main concern of the state. An ad valorem tax takes its name from the character for price: the government taxes a drink on its price, so as the product grows dearer the tax rises in proportion. A specific tax is set not on price but on the product’s character — its alcohol strength, its volume, and the like. Once a specific tax is applied, even the same beer can come out at very different prices, according to the character of the product.

In Korea the liquor tax has changed several times. The idea of such a tax is estimated to have been first introduced in 1909; that year stays in 1909. After the Korean Empire and the Japanese colonial period, a specific tax was written into law after liberation. Under the Park Chung-hee government, an ad valorem tax was put forward in order to restrain drinking and raise tax revenue, and from then, the speaker says, Korea kept the ad valorem form. In 1995, when the government joined the WTO, the ad valorem tax was slightly revised under WTO guidance: the ad valorem form was kept, but the same levy was applied to all distilled spirits. That year stays in 1995. The government that had held to the ad valorem tax then returned, from 2020, to a specific tax. That year stays in 2020, and is not recast as a later official total.

The change became a large issue, the speaker says, because the policy touches many industries and many people, not only makers and the government. Drinkers feel price changes, which can lead on to illness and health, and so to national health insurance and related offices. Policy researchers review legal justification and possible further side effects. The tax is also tied to international bodies such as the WTO, and, through imported drinks, to trade relations. All of this, in a broad view, can bring a general change in the economy. Liquor-related taxes, the notes say, are used for regional development under the Special Act on Balanced National Development.

How the older system worked, and the case each side can make

Under the older ad valorem system, domestic drinks were taxed on the ex-factory price, and imports on the declared import price. The rates were made up of the liquor tax, an education tax, and a combined rate. The government, the speaker says, applied a special, lower levy to many small craft-beer makers, in order to support them.

The government argued that a change to a specific tax was needed, first, because the older system left an inequality between domestic and imported beer: imported beer was taxed on the declared import price rather than on a production price, so the price could be set arbitrarily. High-priced products also paid a higher tax, which limited the development and production of higher-quality drinks. Most advanced countries, the government added, maintain a specific tax, and the change would also make the calculation of the levy easier for the state. The speaker does not take this as a reason to treat a specific tax as good in every case, and turns to the advantages and disadvantages of each form.

An ad valorem tax, the notes say, has an equity in taxing by price; similar drinks can be set at similar prices, so relative prices can be kept; imports can be taxed differently through tariffs; and as prices rise with inflation, tax revenue rises naturally as well. A specific tax, by considering the product’s character, can realize what the speaker calls a truer equity; if the levy is set by alcohol strength, import tariffs need not be considered in the same way, which eases the government’s administration; and because a drink’s character includes volume and capacity as well as strength, the levy can be applied with some flexibility. The drawbacks of an ad valorem tax include its failure to consider product character, and the unfairness that can follow; import prices also move with the exchange rate and other international conditions, and domestic firms may be tempted to set a product’s price arbitrarily in order to lower the tax. A specific tax, for its part, can leave products of the same type — beer, or makgeolli — at widely different prices according to their character; once price drops out of the tax base, makers of expensive drinks stand in a favorable position, and taxing imports and domestic products by the same standard can hurt domestic firms; from the government’s side, real tax revenue may also fall.

Why the speaker favors a specific tax, with a rise in imports from 2013

Even though the policy had already been decided, the speaker says, a lively debate for and against it was still going on among decision-makers and specialists. The speaker judges a specific tax the more suitable form for Korean society, for five reasons. First, consumers’ tastes in drink are diversifying; interest in fruit wine, for instance, has been rising, and people want a wider range of drinks. Second, as travel and study abroad have increased, interest in foreign liquor has risen, and this has led naturally to more imports. Imported liquor, the speaker says, had steadily increased from 2013; that rise stays in 2013, and is not recast as a later official total.

Traditional liquors such as makgeolli are a product of the country’s culture and history, and a specific tax, the speaker argues, is more favorable if they are to be preserved and developed. In the domestic industry, except for some large firms, most makers are small; for those small firms a specific tax is favorable, and the reform can be used to foster them and, through that, to create work. Last, a specific tax can meet what consumers want: in the society the speaker describes, many potential buyers are willing to pay something extra for a premium drink. Taken together, the speaker says, a specific tax can satisfy consumers and a social current, contribute to the growth of small liquor businesses, help preserve and develop traditional liquors, and realize a truer equity according to the product’s character.

The speaker therefore holds that a specific tax is the more suitable method, and asks the government, in carrying the policy out, to take care of several points. Confusion is easy when a policy is newly recast, so effort will be needed to prevent early confusion, and the policy should be carried out gradually. Industries that may be harmed or suffer side effects should be identified, so that the harm can be kept small. The government should thoroughly gather and analyze information on liquor and related industries. Those cautions are left as the speaker’s, at the time of the talk. The same Korean report, at fuller length, is on CampusDown.

Sources

1. A student presentation script on Korea’s liquor tax, distinguishing a specific tax from an ad valorem tax.
2. The idea of the tax estimated from 1909; a 1995 revision on WTO accession; a return to a specific tax from 2020; imported liquor steadily increased from 2013. Those years stay in place.
3. The speaker’s case for a specific tax, and cautions that the change be carried out gradually.

Last updated: 14 November 2026