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Vietnam's Alcohol Tax Impact Analysis

Alcohol is classified as a demerit good, leading to high indirect taxes globally, with Vietnam imposing significant special consumption taxes (SCT) aimed at reducing consumption. Experts warn that increasing these taxes could drive demand to parallel markets, exacerbating inequity and economic inefficiency. Proposed tax strategies suggest gradual increases to balance health concerns with economic growth, with a preference for a more moderate approach to avoid negative impacts on the economy.

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164 views11 pages

Vietnam's Alcohol Tax Impact Analysis

Alcohol is classified as a demerit good, leading to high indirect taxes globally, with Vietnam imposing significant special consumption taxes (SCT) aimed at reducing consumption. Experts warn that increasing these taxes could drive demand to parallel markets, exacerbating inequity and economic inefficiency. Proposed tax strategies suggest gradual increases to balance health concerns with economic growth, with a preference for a more moderate approach to avoid negative impacts on the economy.

Uploaded by

Johnny PHAM
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

Alcohol is determined to universally be a demerit good.

Thus, governments

around the world discourages its consumption. Naturally, alcohol is usually a good

that comes with a high indirect tax. By the WHO (2025), 17.2% is the excise tax

on beer and 26.5% is the excise tax on spirits. However, in Vietnam specifically,

alcohol is also considered a luxury product. This means that it is also heavily given

a “special consumption tax” (SCT) which is also an ad valorem tax. Vietnam has

already imposed 65% tax with 20% or higher alcohol levels as well as beer and

35% on beverages with less than 20% alcohol (Reuters, 2025). They are aiming for

90-100% by 2030. This comes as a controversy as legislation implementing in

2026 to raise the SCT because experts debate that by having higher taxes, there

will be parallel markets, decreased equitability, and delayed growth.

Here is a graph showing the

correction of negative externalities

of consumption of alcohol. This is

because when consuming alcohol,

social costs also arise such as

increased health care expenses,

reduced productivity, higher crime

rates, and domestic violence (Movendi National, 2025). As we can see that

consuming demerit goods do not only affect the consumer, but it also affects the
society as well. Therefore, we would want our optimum demand for demerit good

to be as low as possible. Thus, on the graph we would see a how Qopt is lower than

Qm. The difference between the curve represents the social costs. Welfare loss is

derived from the allocative inefficiency: the dead weight loss is the overallocation

of resources to produce alcohol, which is a demerit good.

To discourage this social cost, government

imposes an indirect ad valorem tax (a fixed

percentage of the price on this good and

service) to discourage the consumption of

alcohol. This raises the price of Alcohol

Consumed from Pm to Popt which reduces

the quantity demanded for alcohol to decrease from Qm to Qopt . This is because

these taxes would be adding to the costs of production, resulting in higher price.

This would force consumers to have a contraction in demand due to the high

prices. Here, we could see that by imposing a tax that is exactly equal to the

external cost, so that the MPC shifts upwards until it overlaps the MSC. This isn’t

economically viable most of the time because the strain of adding tax onto the

product would cause much less economic growth. Therefore, the indirect taxes for

these demerit goods would usually be less than the external cost. However, the area

that resulted in a jump between the two graphs would be the value the government
receives from these taxes. Government can therefore reallocating this new avenue

of money to facilities that could then further offset these social external costs.

The experts in this article assume that the consumption of alcohol is much

higher for households: therefore, they predict that by the increase of SCT tax on

alcohols, the demand for these products on the parallel market would increase. This

would be a possibility because the demand for alcohol is relatively inelastic and by

increasing the price of these products, these consumers would have to look for

illegal goods/unauthorized by the Vietnamese Customs control to fulfil their needs.

The article states that there is a “71% surge in unofficial beer output in 2024”

Consequently, by increasing the STC, the Vietnamese government is further

increasing the equitable divide between the rich and the poor, thereby retaining

allocative inefficiency.

The solution that these experts provide for this allocative inefficiency is to

implement “tax increases from 65 percent to 70 percent, then raise by 5 percent

annually until reaching 90 percent in 2030” or “tax increases from 65 percent to 80

percent, then raise by 5 percent annually until hitting 100 percent in 2030.” I think

that by raising definitively and jumping from 65% to 80% (option 2) would make

the Vietnamese economy to grow slower. This is because, as established, alcohol is

a relatively demand inelastic product for the lower class; therefore, this jump from

65% to 80% would be big enough for the lower classes to stop spending on this
product. This would mean that the vienamese alcohol businesses would lose in on

revenue, resulting in government losing in tax revenue. This cycle would also

affect unemployment by increasing it. Therfore, following option 1 is safe and

much better for the economy.


REFERENCES:

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drinking?

Common questions

Powered by AI

Vietnam's strategy to increase alcohol taxes aligns with global public policy trends that aim to reduce negative externalities of demerit goods through behavioral economics mechanisms like taxes. This reflects a growing tendency to use fiscal tools to curb consumption while reallocating tax revenues to mitigate related social costs, balancing public health with economic concerns .

Vietnam aims to balance public health objectives and economic considerations by implementing a gradual increase in the Special Consumption Tax (SCT) on alcohol, moving from 65% to potentially 100% by 2030. This policy takes into account the inelastic demand for alcohol and aims to minimize illegal market growth and economic slowdown. The strategy involves an incremental tax increase to manage the economic impact on both consumers and the alcohol industry .

The government plans to gradually raise taxes to manage economic and social side effects while potentially diverting revenue to public health initiatives. However, experts debate sufficiency as economic growth could slow, unemployment may rise, and illegal markets could expand, indicating a need for comprehensive strategies including enforcement against illegal sales, support for affected industries, and public education .

Welfare loss from alcohol consumption is addressed by implementing taxes that aim to reduce quantity demanded to optimal levels. However, achieving allocative efficiency is challenged by the societal costs outstripping tax revenue. Perfect efficiency is impractical as taxes covering full external costs could suppress growth and increase unemployment, leaving a gap in socioeconomic support that taxes can't fully address .

Incremental increases in alcohol taxes allow for gradual adaptation by consumers and businesses, potentially minimizing economic disruption and social inequality. Sudden increases may sharply reduce legal market revenue, prompting growth in parallel markets and disproportionally impacting low-income consumers, thus exacerbating economic divide and inefficiency .

Dramatic increases in alcohol taxes can lead to parallel markets and increased inequality between rich and poor, as wealthier individuals can afford the official products while others resort to illegal markets. Furthermore, a sudden increase may stifle economic growth by reducing demand, affecting revenue for businesses and the government, and potentially raising unemployment due to reduced industry activity .

External social costs, such as healthcare expenses, lost productivity, and crime, are critical in shaping Vietnam's alcohol taxation policy, which seeks to internalize these costs through taxes. The policy framework aims to reduce these externalities by increasing the alcohol tax to align the marginal private cost with the marginal social cost, thereby reflecting the comprehensive societal impact of alcohol consumption .

The relatively inelastic demand for alcohol suggests that consumers are not highly responsive to price changes, making a gradual increase in tax potentially more effective. A sudden, large tax increase could push consumers to illegal markets, thus reducing the intended decrease in legitimate consumption and tax revenue while maintaining the societal costs associated with alcohol consumption .

Vietnam classifies alcohol as a demerit and luxury good because it is associated with negative externalities like health issues and social problems, while being non-essential. This dual classification leads to high excise taxes and a Special Consumption Tax, reflecting both economic disincentive for consumption and revenue generation from luxury preferences, which reinforces governmental efforts to reduce alcohol-related social costs .

The predicted growth in illegal markets, following alcohol tax hikes, poses a significant barrier to policy effectiveness. As price increases drive consumers to cheaper illegal alternatives, the policy fails to reduce consumption or capture intended tax revenues, thereby undermining objectives to moderate consumption and counter social costs. Solutions must consider enforcement and alternative deterrents, not just price .

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